As economic crises pile up, Bernanke warns Congress recovery is ‘close to faltering’

Martin Crutsinger and Christopher S. Rugaber, AP Economics Writers
Tuesday October 4, 2011, 6:04 pm EDT

WASHINGTON (AP) — Europe has a debt crisis. America has a jobs crisis. Corporate profits could be in trouble. World financial markets are in turmoil. And no one seems prepared to ride to the rescue.

Federal Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday of what most of America has sensed for some time: The economic recovery, such as it is, “is close to faltering.”

The central bank chief spoke on a day when the stock market spent most of the trading hours in bear market territory — down 20 percent from its most recent highs in April. A late-day rally helped the market finish higher.

Bernanke’s exchange with lawmakers seemed to capture the growing belief that no one is prepared to help the global economy in any meaningful way anytime soon. Speaking in unusually frank terms, he also captured the nation’s sour economic mood.

The Fed chief was asked about protests around Wall Street, which went on for an 18th day as demonstrators railed against corporate greed and expressed frustration over the economy.

Bernanke replied: “I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess. And they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them.”

“Certainly, 9 percent unemployment and very slow growth is not a very good situation,” he added. “That’s why they are protesting.”

Throughout the day, traders and U.S. policymakers kept one eye on Europe, where a debt crisis has dragged on more than a year. Investors worry that a messy default by Greece could hurt European banks and their American counterparts.

On Tuesday, the Greek finance minister said the nation has enough money to pay pensions, salaries and bondholders through the middle of next month — and that was seen as good news. Bernanke told Congress there was little the Fed could do about Europe’s problems.

“Unfortunately, we are innocent bystanders here,” he said. “I am persuaded they are aware of the risks.”

Bernanke said he believes the Fed’s latest move to help the economy would be “meaningful but not an enormous support” for the economy. The program, known as Operation Twist, is designed to lower long-term interest rates so people and businesses will spend more money.

“It should help, somewhat, on job creation and growth,” the Fed chief told Congress. “It’s particularly important now that the economy is close, the recovery is close to faltering.”

“We need to make sure that the recovery continues and doesn’t drop back and that the unemployment rate continues to fall,” he added.

The Fed has used most of its tools to help the economy. It said this summer that it expects to keep interest rates super-low into 2013. Congress is inclined to cut, not raise, spending. Europe is resisting bold steps to save its most troubled economies. And fears are rising that a recession is on the verge of seizing Europe and eventually spreading around the world.

“We have already taken interest rates down to zero … and this Congress doesn’t seem to be able to do anything,” said David Wyss, former chief economist at Standard & Poor’s. “So not much good is going to happen.”

Investors seem to think so. Stocks sank early Tuesday on fears about Europe, before rising in late morning on Bernanke’s suggestion that the Fed might be open to doing more to help.

Then they tumbled again in the afternoon, only to surge in the final 30 minutes of trading on a report that European leaders might be working on a plan to prop up banks there.

The Standard & Poor’s 500 index finished the day up 2.3 percent at 1,123.95, or about 33 points above what would be considered bear market territory.

Economists at Goldman Sachs forecast in a note this week that Europe could fall into recession by winter. That would push the U.S. economy to “the edge of recession” by early 2012, said Andrew Tilton, an economist with the firm.

Even if a global recession can be avoided, the U.S. economy faces a bleak outlook. Some economists fear that Congress could worsen things by cutting taxes or raising taxes this year or next.

Tilton forecasts overall economic growth of just 1.7 percent this year, followed by a scant 0.5 percent annual rate in the first three months of next year. For all of 2012, he projects 1.4 percent growth. Normal growth is more like 3 percent.

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