Bernanke: recovery hinges on financial turnaround

WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress Tuesday that any hope for an economic recovery will hinge on the government's ability to prop up shaky financial markets.

The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony to the Senate Budget Committee.

The Fed chief found himself on the hot seat when lawmakers voiced concerns the government's new $30 billion lifeline for ailing insurance giant American International Group. The latest plan, announced Monday, marked the government's fourth effort to stabilize AIG.

Both Democratic and Republican lawmakers expressed skepticism over whether the action would work, said they were worried that more taxpayer money will be needed to rescue the company and demanded more accountability.

"I share your anger," Bernanke said. The government didn't really have a choice but to take the action because a collapse of AIG would have grave implications for the country's already fragile economic and financial health, he added.

"We're no better off," huffed Sen. Jim Bunning, R-Ky. "The bottom line: the Fed and the Treasury will leave the door open for more bailouts in the future."

President Barack Obama's recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and "mitigate the overall loss of employment and income that would otherwise occur," Bernanke said.

However, the Fed chief warned that the timing and magnitude of the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face."

The recession, now in its second year, is inflicting more damage to the economy daily as layoffs mount and companies cut production.

The economy contracted at a staggering 6.2 percent in the final three months of 2008, the worst showing in a quarter-century, and the Fed has said it will probably shrink during the first six months of this year. Recent economic barometers "show little sign of improvement," Bernanke said.