Bernanke Has a Two-Track Mind

Federal Reserve Board Chairman Ben Bernanke today reassured Congress—and Wall Street—that the economy will continue to grow at a moderate pace this year and in 2011.

But, he added, it will "take a significant amount of time" for the economy to recover the 8.5 million jobs that were lost in 2008 and 2009.

Appearing before the House Budget Committee, Bernanke declined to take positions on specific legislation. That's up to Congress, he said.

But it's "very useful" for Congress to look at ways to increase lending to small businesses, he said. That sounded close to an endorsement of pending legislation that would create a $30 billion fund to provide cheap capital to community banks for use in making small-business loans.

Bernanke also appeared sympathetic to the need to provide additional federal assistance to cash-strapped state governments. Layoffs of hundreds of thousands of public employees would slow economic growth, he said.

The recovery is still fragile, he said, so it may make sense in the short-term to increase federal spending to help it along.

But any additional spending needs to be accompanied by a plan to reduce federal deficits over the medium and long term, he said. Financial markets need to be assured that Washington has the political will and the ability to reduce the rising tide of red ink facing the nation in the years ahead, he said.

Without a credible plan to address future deficits—which will grow due to the strain that our aging population will put on Medicare and Social Security—the federal government will face higher interest rates on its exploding debt, and the entire economy will suffer, he said.

"At that point, things will fall apart," he said. He hopes the deficit reduction commission appointed by President Obama will come up with a good plan, but "there's not anything on the table at this point," he said.

Bernanke also urged Congress to act quickly on reforms to Fannie Mae and Freddie Mac, the government-sponsored enterprises that support the housing market by securitizing mortgages. Huge losses forced the federal government to place these entities in conservatorship in 2008, a situation that can't continue indefinitely, Bernanke said.

"We're going to need to reform those institutions going forward," he said.

Republicans contend these reforms should have been included in the financial regulatory reform bills passed by the House and Senate.

Bernanke said Congress needs to finish its work on financial regulatory reform as soon as possible so that banks know what's going to be expected from them. He also agreed that uncertainty over the direction of tax policy and regulatory policy as a whole is making businesses hesitant about expanding.

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Kent Hoover is the Washington bureau chief for bizjournals.