Thursday, February 28, 2008

Federal Reserve Chairman Ben S. Bernanke said for the first time today that he expects some bank failures as a result of the spreading financial crisis.

Mr. Bernanke’s testimony before the Senate Banking Committee provided his gloomiest assessment of the economy to date and came after the government reported economic growth fell close to zero in the fourth quarter, edging up by only 0.6 percent.

The country has not seen widespread bank failures since the savings and loan crisis in the late 1980s, which led to an expensive taxpayer-financed bailout, a major credit crunch and deep recession in 1990-91.

Mr. Bernanke is the first top bank regulator to say publicly that the failure of bedrock financial institutions likely will mark the current economic downturn as well.

“There probably will be some bank failures,” he said, although he added that they are likely to be among smaller regional banks that are particularly exposed to falling property markets.

Much attention has focused on the biggest banks and investment houses such as Citicorp, J.P. Morgan, Bank of America and Merrill Lynch, which together have reported more than $150 billion in losses since the fall. Despite their monumental troubles, Mr. Bernanke said he believes the large banks have enough reserves and capital to avoid failure.

About half of the capital the large banks have raised since the financial crisis started last fall have been provided by sovereign wealth funds controlled by foreign countries such as Qatar and China, Mr. Bernanke noted, calling the foreign assistance to U.S. banks “constructive.”

Small banks, for the most part, do not have access to such foreign capital, and thus are more vulnerable to failure because of their growing mortgage-related losses, analysts say.

Mr. Bernanke provided the Senate committee with his frankest and soberest economic outlook so far, saying the economy is in worse condition today that it was at the start of the 2001 recession, which was one of the mildest on record.

Unlike in 2001, the Fed’s task of reviving the economy is “complicated” by rising inflation driven by soaring prices for oil, food and other internationally traded commodities, he said.

Also, in 2001 the federal government had large budget surpluses it was able to deploy through tax cuts and increased spending to support the economy. But today it is weighed down with large deficits and huge looming liabilities as the baby boom generation retires, he said.

Most importantly, Mr. Bernanke said, the biggest burden during the 2001 recession was borne by technology businesses and stock investors who overinvested in now-defunct tech firms, he said, while the “brunt” of today’s downturn is being borne by American consumers.

Consumers are getting hit by high food and energy prices at the same time they are suffering the effects of a major credit crunch and plummeting house prices, he said.

Regular gas prices have surged back above $3 a gallon while home prices are down 10 percent on average and much more in many major cities.

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