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Global recovery prospects 'appear good': Bernanke

By AFP

US Federal Reserve chief Ben Bernanke said Friday that global recovery from recession appeared good despite financial market strains but cautioned that any economic growth would be slow at first.

"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," he told central bankers at a meeting in Jackson Hole, Wyoming.

Bernanke said although fears of financial collapse had receded substantially, critical challenges remained as the world grappled with a financial crisis that slammed the brakes on growth following a US home mortgage meltdown.

"Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit," he said.

"Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels," he said in his speech entitled "Lessons from a Year in Crisis."

The United States is expected to post positive growth in the third quarter after two consecutive quarters of contraction.

Germany and France, Europe's biggest economies, have bounced back with growth in the second quarter after shrinking for the previous four quarters. Japan's economy has also grown for the first time in more than a year.

Looking back at the two-year financial crisis, the US central bank chief said that as severe as the economic impact had been, the outcome could have been decidedly worse.

Without the "aggressive and complementary" policies by governments across the world, the financial panic last October would likely have continued to intensify and the entire global financial system would have been at serious risk, he said.

"Although we have avoided the worst, difficult challenges still lie ahead," said Bernanke, who took radical steps to contain the contraction of the world's largest economy, including slashing interest rates to virtually zero and pumping billions of new money into the financial system.

"We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years," he said.

He called on central bankers to "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."

Although generalized pressures on financial institutions have subsided somewhat, he said, government actions to prevent the "disorderly failures of individual, systemically significant institutions" continued to be necessary.

Bernanke said that in the United States particularly, the use of Fed liquidity facilities had declined sharply since the beginning of the year -- "a clear market signal that liquidity pressures are easing and market conditions are normalizing."

He said a key lesson of the crisis was that liquidity risk management proved as essential as capital adequacy and credit and market risk management, particularly during times of intense financial stress.

Only central banks, he stressed, were well-positioned to offset a sharp decline in liquidity and credit provision by the private sector. "They must be prepared to do so."

The role of liquidity -- the ability of an asset to be converted into cash quickly and without any price discount -- "in systemic events provides yet another reason why, in the future, a more systemwide or macroprudential approach to regulation is needed," Bernanke said.

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