Fed boss says plodding economy still needs help

[September 25, 2010]  WASHINGTON (AP) -- The economy is recovering from a deep recession more slowly than anticipated and still needs help from the Federal Reserve, Chairman Ben Bernanke said Friday.

The Fed's efforts to pump up the economy and lower unemployment have fallen short, Bernanke indicated in remarks at a conference at Princeton University in New Jersey, where he once taught economics.

"Although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment," Bernanke said.

Even though the Fed has held a key interest rate at a record low near zero for nearly two years, economic growth is only plodding ahead and unemployment remains elevated. It's now at 9.6 percent.

"We are recovering at a pace slower than we'd like," the Fed chief acknowledged during a question-and-answer session after his speech. "The economy continues to need support," he added.

The Fed signaled this week that it was prepared to take new action if the recovery weakens further. One likely step would be for the Fed to relaunch a program to buy government debt on a large scale. The move would be aimed at lowering rates on mortgages and other loans to entice Americans to spend more, which would shore up the economy.

Bernanke didn't talk Friday about steps the Fed might take to boost the economy. The bulk of his mostly academic remarks were about the lessons learned from the 2007-2009 financial crisis.

On that front, Bernanke said Fed policymakers must better understand speculative buying in financial markets to help prevent another financial crisis.

Frenzied buying fed a housing bubble that burst, plunging the economy into a recession in 2007, the worst downturn since the 1930s. While many lessons were learned from the crisis, Bernanke said in prepared remarks that additional research is needed to explain when and why bubbles start.

That -- along with a better understanding of how bursting bubbles affect consumers, businesses and investors -- would help Fed policymakers as they seek to prevent another financial crisis from happening, he added.

The Fed chief also said a new law overhauling the nation's financial regulatory system should help prevent another financial crisis. For its part, the Fed also has been taking steps to strengthen oversight of big financial companies.

Looking ahead, Bernanke called for not only more study into the formation of speculative bubbles, which can develop in assets like homes, stocks, bonds or commodities, but also for more research in the field of behavioral economics, which studies what makes people tick.

Bernanke spoke of the profound uncertainty during the crisis that prompted panicky selling by investors, sharp cuts in payrolls by employers and big savings buildups by households.

Before the crisis, economists had ideas about how they believed people would act when faced with uncertainty. But that was tested sorely by the crisis, Bernanke said.

"During the worst phase of the financial crisis, many economic actors -- including investors, employers and consumers -- metaphorically threw up their hands and admitted that, given the extreme, and in some ways, unprecedented nature of the crisis, they did not know what they did not know," Bernanke said.

And, economists need to do a better job of connecting the dots between financial developments and their impact on the economy, Bernanke said.

"The great majority of economists did not foresee the near-collapse of the financial system," he said.

[Associated Press; By JEANNINE AVERSA]

Associated Press writer David Porter in Princeton, N.J., contributed to this report.

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