Ben Bernanke's economic half-truths

In his report to Congress, the Fed chair wasn't as decisive as he needed to be about the government's plan to fix the economy

US Federal Reserve chairman Ben Bernanke's semi-annual report to Congress opened on a down note, with senator Chris Dodd remarking that lenders had just foreclosed on the mortgage of Bernanke's childhood home.

But if Bernanke's testimony, coming hours before President Barack Obama's first joint congressional address, brought a little light – a brighter-than-usual economic forecast – it comes with a side of ambiguity about the key issues of the day. A semi-autonomous federal official appointed by George Bush, Bernanke's testimony was eagerly awaited as debates about nationalisation rage and a new poll reports that Americans, despite their confidence in the new president, are concerned about the efficacy of his response to the economic crisis.

At first glance, Bernanke's prediction for economic recovery in the US sounded good: The recession could end in 2009. But the recession will only end, he underscored, if the president, Congress and the Fed succeed in putting together an effective response to the crisis. More bluntly: If the government fixes the recession, the recession will end.

The end of a formal recession isn't the end of the US's economic troubles. Even with that projection, the Fed is predicting 8% unemployment in 2010, a little more than current levels. Only in 2011 will unemployment begin to drop to today's rates, much less rates of around 5% that characterise periods of economic growth. Even then, the Fed chair cautioned that these forecasts offer "considerable uncertainty".

Bernanke emphasised that fixing the financial system was key to getting the economy moving again. Without a functioning credit market and new investment, growth is impossible. But the administration's response to the financial-aspect of the crisis has been lacking so far, as Treasury secretary Tim Geithner's first plan was criticised for a lack of detail and vision, and recent efforts to extend further funding to the embattled banking giant Citigroup met with questions about transparency and how far the government will go in propping up bad banks. On both the left and, yes, the right, experts wonder whether the government will bite the bullet and put insolvent banks through some kind of temporary nationalisation programme along the lines of Sweden's response to their similar banking crisis.

Bernanke may have given something of an answer, in response to a question about the "stress tests" to determine solvency that are part of Geithner's plan. After determining how much capital would be needed in a worst-case scenario, the government will buy convertible preferred stock. In the event of further insolvency, that stock will be converted to common stock. "Only at that time, going forward, would the ownership implications become relevant," Bernanke said. That's backdoor nationalisation for you. But continued ambiguity from Bernanke and the rest of the administration isn't the financial stabilisation called for in the Fed chair's recipe for recovery.

Bernanke refused to be drawn into partisan remarks by members of either party, with one early exception, when he agreed with senator Jack Reed, a Democrat, that state governors – mostly Republicans – refusing to use funding from economic stimulus legislation would reduce the positive effects of the stimulus. But he declined to agree with Chuck Schumer that regulating hedge funds should be a priority, and he also declined to agree with Dodd that social security privatisation would have been a mistake, though he was forced to recognise that had that money been tied up in the stock market, the effects would have been disastrous. Nor would the Fed chair endorse the stimulus legislation directly, instead referencing his support for "substantial fiscal action" and deferring to Congress' view of the issue.

The take-away from the hearing is that key economic policy players are still leery of further federal intervention in the financial system even as they realise it is becoming increasingly necessary. Notoriously erratic senator Jim Bunning – recently in the news for predicting the death of ill Supreme Court justice Ruth Bader Ginsburg – told Bernanke today: "One of the causes of the recession is that the American people do not believe you … are telling the truth."

That statement isn't true at all, of course, resting on par with the GOP's "mental recession" talking point during the 2008 election. But it does get at one of the reasons the recession is continuing: Bernanke and his fellow economic policy hands aren't lying – they're just not telling the whole truth. It's time for a clear, decisive plan to solve the financial crisis, not more "considerable uncertainty".