Bernanke: Economy lacks strength to sustain gains

[March 23, 2012]  WASHINGTON (AP) -- There is still not enough spending and investment to sustain the economic recovery, Federal Reserve Chairman Ben Bernanke said Thursday.

Bernanke said consumer demand remains weak relative to its level before the Great Recession. He noted that other contributors to economic growth -- including borrowing and trade -- have declined.

"Consumer spending has not ... recovered. It's still quite weak relative to where it was before the crisis," Bernanke said in the second of four lectures he is giving to George Washington University students this month. "We lack a source of demand to keep the economy growing."

His comments provided further insight into the reasoning behind the Fed's plan to hold short-term interest rates near zero through 2014. The central bank has stuck with that timetable despite three months of strong job growth and other signs of economic improvement.

Many economists believe that Fed officials will not make any changes in policy at their next meeting on April 25-26 and will only ease credit conditions if the economy slows further.

Applications for unemployment benefits fell last week to a four-year low, providing more support to the view that the job market is strengthening. From December through February, employers have added an average of 245,000 jobs per month, the best three months of hiring in two years.

But incomes are still barely keeping up with inflation and people are having to cope with a big jump in gas prices.

In his lecture Thursday, Bernanke covered the Fed's history from the end of World War II through the housing boom of the last decade. The boom followed by a collapse in housing that contributed to a financial crisis and deep recession.

Bernanke said he did not think the Fed's low interest rates in the early part of the decade contributed to the housing bubble. He did say he believes the central bank made mistakes in supervision and regulation that did play a role in banks making unsound mortgage loans.

"A lot of banks simply didn't have the capacity to thoroughly understand the risks that they were taking," Bernanke told the students. "I think the Fed and other bank supervisors didn't press hard enough on this and that turned out to be a serious problem."

[Associated Press; By MARTIN CRUTSINGER]

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.