Financial Experts Say Reid, Bernanke Appeal to American Psyche

When Harry Reid said Monday that the U.S. would soon enjoy an economic turnaround, the Senate Majority Leader was speaking to the American psyche.

Economists say Reid's optimism is an effort to appeal to individual feelings of hope and confidence -- and is based on little, if any, factual evidence.

"We're getting very close to stabilizing the banking industry" and "things are beginning to turn and the American people are going to feel that very soon," he said in an interview Monday on MSNBC.

Reid spoke a day before Federal Reserve Chairman Ben Bernanke testified before the Senate Banking Committee to explain what government agencies are doing to thaw frozen credit markets.

After saying the economy is "suffering a contraction," Bernanke -- like Reid -- offered some words of hope.

Bernanke told Congress "there is a reasonable prospect" that 2010 will be a recovery year, provided credit flows normally and financial markets work.

"If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," he said.

Some financial experts say Reid and Bernanke are wise in their approach. The current economic outlook is indeed grim, but to speak pessimistically does nothing to stimulate the economy, they say.

"If confidence begins to spiral down then it becomes self-fulfilling and makes the situation even worse," said Michelle Girard, senior economist and managing director at RBS Greenwich Capital, a fixed-income capital markets firm.

And just hours after Bernanke's testimony, the Dow Jones industrials finished up 236 points -- Wall Street's biggest one-day rally in more than a month.

Former President Clinton urged Obama last week to replace pessimism with optimism -- though administration advisers have warned that Obama must be careful to walk a fine line between honesty and hollow optimism.

But Girard said words only go so far. Americans, she said, also need credible information to boost confidence in spending and investing.

"To turn things around, people need information," she said. "They need to more of what the policies are going to be, and the specifics on the plan. They need to know who has the problems and how we're going to fix them."

"We still don't have anything yet to go on," she said.

And eventually, Americans will need to see measurable results, financial experts say.

"Stabilization in bank stocks would be the first sign that the situation is improved," Girard said.
"The best indicator to know that the banks are as healthy again is to see the stock prices rise," added Peter Murici, economics professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

And Bernanke has also said that recovery would hinge on stabilizing the nation's banks. The government said it has the option of expanding its ownership stakes in shaky banks by converting the preferred stock it got for last fall's bailout money to common stock.

On Tuesday evening, President Obama will deliver a prime-time speech from the House of Representatives to give specifics on what needs to be done to turn around the economy -- an address that is expected to be broad, spelling out what he wants and how he will do it. And on Thursday, he will present a budget blueprint to Congress.

The Associated Press contributed to this report.