BERNANKE TAKES GRIM VIEW ON ECONOMIC GROWTH POSSIBILITIES

In testimony this morning before a Congressional committee, Federal Reserve chairman Ben Bernanke stated that economic growth was likely to be minimal and that contraction of the economy was possible in the first half of the year. Mr. Bernanke's comments now seem to be in line with those of most reputable economists, who for some time have been stating that it is not only possible, but likely that the United States GDP would contract in the first half of the year. If this does happen, it would become an official recession.

From The New York Times:

Over all, Mr. Bernanke said, “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.”

While he said growth would likely recover in the second half of the year, and return to a “sustainable pace” in 2009, he warned that the current turbulence made the economic outlook difficult to predict.

“The uncertainty attending this forecast is quite high and the risks remain to the downside,” he said.

BERNANKE ASKS BANKS TO FORGIVE PORTION OF MORTGAGES

From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages for more borrowers whose home values have declined.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech in Orlando, Florida today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

FED MAKES HALF-POINT CUT

From USA Today:

The Federal Reserve cut interest rates a half-percentage point Tuesday in a dramatic bid to shore up confidence in the economy and ease worries about a credit crunch in financial markets.

Fed Chairman Ben Bernanke and his colleagues unanimously voted to lower their target for short-term interest rates, which influences a wide variety of borrowing costs, to 4.75% from 5.25%. The cut was the first from the Fed in more than four years and followed 15 months of steady rates from the central bank.

In their post-meeting statement, Fed policymakers said the credit squeeze "has the potential" to sharpen the housing decline and harm the larger economy. They said turmoil in financial markets had "increased the uncertainty" about the economic outlook.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," they wrote.

The Fed on Tuesday also cut the discount rate, the rate it charges banks for direct loans, by a half-percentage point, in a move to facilitate lending. A month ago, the Fed, in a rare move, cut the discount rate, which usually moves in tandem with the Fed's main interest rate lever, to help ease the credit crunch.

Financial markets moved sharply higher in response to the Fed move Tuesday, with the Dow Jones industrials adding more than 100 points within minutes of the Fed announcement. They closed up more than 300.

SENATOR CLINTON EXPRESSES CONCERN ABOUT FOREIGN-OWNED U.S. DEBT

Senator Hillary Clinton expressed concern about the "economic vulnerabilities" posed by foreign interests owning large amounts of U.S. debt. On the Senate floor, and in letters to Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, Senator Clinton said that President Bush's economic policies have contributed to an "erosion of U.S. economic sovereignty" and added that it is "undeniable that the exponential growth of foreign debt in the last six years has undermined our economic standing."

From The Wall Street Journal:

Currently, the U.S. imports more goods than it exports from places like China, resulting in a trade deficit, and it borrows heavily from abroad to finance its domestic investment. Foreign interests own about $2.2 trillion of U.S. Treasury securities -- or about 52% of the public debt not held by the U.S. government, compared with about 20% in the early 1990s, during the Clinton administration. The U.S. has come to rely on foreign capital because Americans don't save enough to finance the nation's domestic investment.

...there is broad concern that the growing reliance on foreign investors puts the U.S. at risk, and some say the way to address it is to begin saving money at home by erasing the current $248 billion budget deficit, moving into a surplus and putting money aside to pay for costly obligations like Social Security and Medicare.