Federal Reserve Chairman Ben Bernanke declared Friday that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression.
Economic activity in both the U.S. and around the world appears to be "leveling out," and "the prospects for a return to growth in the near term appear good," Bernanke said in a speech at an annual Fed conference in Jackson Hole, Wyo.
The upbeat assessment was consistent with the Fed's observations earlier this month. The central bank has taken small steps toward pulling back some emergency programs to revive the economy.
Still, Bernanke stressed Friday that despite much progress in stabilizing financial markets and trying to bust through credit clogs, consumers and businesses are still having trouble getting loans. The situation is not back to normal, he said.
Restoring the free flow of credit is a critical component to a lasting recovery.
"Although we have avoided the worst, difficult challenges still lie ahead," Bernanke told the gathering. "We must work together to build on the gains already made to secure a sustained economic recovery."
Strains in financial markets worldwide persist. Financial institutions face "significant additional losses" on soured investments and many businesses and households are experiencing "considerable difficulty" in getting loans, he said.
The Fed chief's remarks come two years after the financial crisis broke out and nearly one year after it had deepened to the point of sending the nation into a near meltdown.
The bulk of Bernanke's speech was a chronicle of the extraordinary events of the past year. Financial markets took a turn for the worst starting last September and into October, nearly shutting down the flow of credit. The crisis felled storied Wall Street firms and forced the government to take over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.
Despite efforts to save it, Lehman Brothers failed. It filed for bankruptcy on Sept. 15, the largest in corporate history, which roiled markets worldwide.
To prop up shaky banks, the government created a $700 billion bailout fund, a program that proved wildly unpopular with an American public suffering fallout from the recession.
The Fed swooped in with unprecedented emergency lending programs to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programs to stimulate the economy, the most recent coming in February with President Barack Obama's $787 billion package of tax cuts and increased government spending.
"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk," Bernanke said.
In recounting actions by the Fed and the government to battle the crisis, Bernanke didn't acknowledge any missteps by the central bank and other regulators. Critics have argued that the Wall Street bailouts in particular sent a message that companies that take reckless gambles will be rescued by the government. There's also the concern that the rescues put taxpayer's dollars at risk.
The public and lawmakers on Capitol Hill were incensed by the repeated taxpayer bailouts of AIG, totaling more than $180 billion, and outraged after the company paid hefty bonuses to employees who worked in the very division that brought down the firm. The $700 billion taxpayer-funded bailout program used to prop up banks, AIG, General Motors, Chrysler and other companies also drew criticism from the public and politicians.
But unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Bernanke, a scholar of the Great Depression.
"As severe as the economic impact has been, however, the outcome could have been decidedly worse," he said.
Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the U.S. and other governments delivering fiscal stimulus, he noted.
"The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge," the Fed chief observed.
Sponsored by the Federal Reserve Bank of Kansas City, the conference draws a virtual who's who of the financial world -- Bernanke's counterparts in other countries, academics and economists. This year's forum focused on lessons learned from the crisis and how they can be applied to prevent a repeat of the debacles.
To that end, Bernanke again called a rewrite of the U.S. financial rule book -- something Congress is currently involved in. He again pressed for stricter oversight of companies -- like AIG -- whose failure would endanger the entire financial system and the broader economy. Obama would tap the Fed for that job, something many lawmakers in Congress don't like.
Bernanke also said the U.S. needs a process to wind down big, globally interconnected companies, much like the Federal Deposit Insurance Corp. does for failing banks.
"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again," he said.