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Bernanke: Fresh stimulus worth considering

Washington_Federal Reserve Chairman Ben Bernanke, saying the country's economic weakness could last for some time, threw his weight Monday behind a fresh round of government stimulus.

Stocks surged afterwards as the Fed chief also appeared to leave the door open to additional interest rate reductions.

Bernanke's remarks before the House Budget Committee marked his first endorsement of another round of energizing stimulus. Democrats on Capitol Hill have been pushing for one, but the Bush administration has been cool to the idea as it watches the federal budget deficit explode.

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke said in prepared testimony to the panel.

Bernanke suggested that Congress design the stimulus package so that it will be timely, well targeted and would limit the longer-term affects on the government's budget deficit, which hit a record high in the recently ended budget year.

The economy has been beaten down by housing, credit and financial crises. Its woes are likely to drag into next year, leaving more people out of work and more businesses wary of making big investments.

U.S. stocks surged in early trading Monday as the credit markets showed signs of easing and after Bernanke's statements. The Dow Jones industrials rose almost 2 percent and the Standard & Poor's 500 index jumped 2.3 percent.

Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown.

"If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," Bernanke said. "Such actions might be particularly effective at promoting economic growth and job creation," he added.

The central bank meets next on Oct. 28-29 and many economists believe Fed policymakers will lower rates again then to brace the wobbly economy.

Over time, "stimulus provided by monetary policy" along with the eventual stabilization in housing markets and improvements in credit markets will help the economy get back on firm footing, Bernanke said.

Dropping rates might induce consumers and businesses to stop burrowing and instead boost their spending, an important ingredient to energize overall economic activity.

So far, though, a string of drastic actions by the Fed and the Bush administration has yet to turn around a bunker mentality. Banks fear lending money to each other and to their customers. Businesses are reluctant to hire and boost capital investments. Consumers have hunkered down. All the economy's problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.

One-third of Americans are worried about losing their jobs, half fret they will be unable to keep up with mortgage and credit card payments, and seven in 10 are anxious that their stocks and retirement investments are losing value, according to an Associated Press-Yahoo News poll of likely voters that was released Monday.

President Bush has repeatedly asked Americans to be patient and give the government's relief efforts time to work. Democrats on Capitol Hill, however, insist another round of economic stimulus is needed.

Unemployment could hit 7.5 percent or higher by next year. Many analysts predict the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.

One of the president's chief economic advisers said Sunday that parts of the country probably already are experiencing a recession, and it could take a few months before the clogged credit system starts working again.

Speaking in a broadcast interview from California, the chairman of the White House Council of Economic Advisers noted that national unemployment stands at 6.1 percent. Ed Lazear said some areas of the U.S., such as California, have even higher rates of people out of work. "We are seeing what I think anyone would characterize as a recession in certain parts of the country," Lazear said.

Americans are feeling strained as their paychecks shrink and their savings shrivel. That's causing consumers to cut back, one of the reasons the economy is losing traction. Economic slowdowns overseas, meanwhile, are expected to crimp demand for U.S. exports, which had buoyed up the economy.

Last week, the Treasury Department announced it would inject up to $250 billion in U.S. banks in return for partial ownership, something that hasn't been done since the Great Depression. The government hopes banks will use the capital infusions to rebuild their reserves and bolster lending to customers.

"We took this measure as a last resort," Bush said last week. "Had the government not acted, the hole in our financial system would have grown larger," he warned.

So far this year, 15 banks have failed, compared with three last year. And Wall Street's five biggest investment firms were swallowed by other companies, filed bankruptcy or converted themselves into commercial banks to weather the financial storm.

In other efforts to stem the crisis, the Federal Deposit Insurance Corp. is temporarily guaranteeing new issues of bank debt - fully protecting the money even if the institution fails.

The FDIC also said it would provide unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses. Frequently, these accounts exceed the current $250,000 insurance limit, so the expanded insurance should discourage nervous companies from pulling their money out.

The Fed and the world's other major central banks recently joined forces to slice interest rates, the first coordinated action of that kind in the Fed's history. The United States and other top economic powers also have adopted a five-point action plan and pledge to do all they can to provide relief.

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