By CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER - AP Economics Writers
WASHINGTON (AP) Europe has a debt crisis. America has a jobs crisis.
Corporate profits could be in trouble. World financial markets are in turmoil.
And no one seems prepared to ride to the rescue.
Federal Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday of
what most of America has sensed for some time: The economic recovery, such as
it is, "is close to faltering."
The central bank chief spoke on a day when the stock market spent most of the
trading hours in bear market territory down 20 percent from its most recent
highs in April. A late-day rally helped the market finish higher.
Bernanke's exchange with lawmakers seemed to capture the growing belief that no
one is prepared to help the global economy in any meaningful way anytime soon.
Speaking in unusually frank terms, he also captured the nation's sour economic
mood.
The Fed chief was asked about protests around Wall Street, which went on for an
18th day as demonstrators railed against corporate greed and expressed
frustration over the economy.
Bernanke replied: "I think people are quite unhappy with the state of the
economy and what's happening. They blame, with some justification, the problems
in the financial sector for getting us into this mess. And they're dissatisfied
with the policy response here in Washington. And at some level, I can't blame
them."
"Certainly, 9 percent unemployment and very slow growth is not a very good
situation," he added. "That's why they are protesting."
Throughout the day, traders and U.S. policymakers kept one eye on Europe, where
a debt crisis has dragged on more than a year. Investors worry that a messy
default by Greece could hurt European banks and their American counterparts.
On Tuesday, the Greek finance minister said the nation has enough money to pay
pensions, salaries and bondholders through the middle of next month and that
was seen as good news. Bernanke told Congress there was little the Fed could do
about Europe's problems.
"Unfortunately, we are innocent bystanders here," he said. "I am persuaded they
are aware of the risks."
Bernanke said he believes the Fed's latest move to help the economy would be
"meaningful but not an enormous support" for the economy. The program, known as
Operation Twist, is designed to lower long-term interest rates so people and
businesses will spend more money.
"It should help, somewhat, on job creation and growth," the Fed chief told
Congress. "It's particularly important now that the economy is close, the
recovery is close to faltering."
"We need to make sure that the recovery continues and doesn't drop back and
that the unemployment rate continues to fall," he added.
The Fed has used most of its tools to help the economy. It said this summer
that it expects to keep interest rates super-low into 2013. Congress is
inclined to cut, not raise, spending. Europe is resisting bold steps to save
its most troubled economies. And fears are rising that a recession is on the
verge of seizing Europe and eventually spreading around the world.
"We have already taken interest rates down to zero ... and this Congress
doesn't seem to be able to do anything," said David Wyss, former chief
economist at Standard & Poor's. "So not much good is going to happen."
Investors seem to think so. Stocks sank early Tuesday on fears about Europe,
before rising in late morning on Bernanke's suggestion that the Fed might be
open to doing more to help.
Then they tumbled again in the afternoon, only to surge in the final 30 minutes
of trading on a report that European leaders might be working on a plan to prop
up banks there.
The Standard & Poor's 500 index finished the day up 2.3 percent at 1,123.95, or
about 33 points above what would be considered bear market territory.
Economists at Goldman Sachs forecast in a note this week that Europe could fall
into recession by winter. That would push the U.S. economy to "the edge of
recession" by early 2012, said Andrew Tilton, an economist with the firm.
Even if a global recession can be avoided, the U.S. economy faces a bleak
outlook. Some economists fear that Congress could worsen things by cutting
taxes or raising taxes this year or next.
Tilton forecasts overall economic growth of just 1.7 percent this year,
followed by a scant 0.5 percent annual rate in the first three months of next
year. For all of 2012, he projects 1.4 percent growth. Normal growth is more
like 3 percent.
European finance ministers suggested Tuesday that holders of Greek debt might
have to absorb larger losses than originally thought. Banks that hold Greek
bonds would suffer. A recession in Europe would also hurt U.S. exports to the
region, damaging corporate profits at home.
Still, Wyss said, "Policy seems to be as frozen there as it is in Washington."
U.S. lawmakers have their own challenges with debt.
Congress is intent on cutting spending over the next several years. At the same
time, Congress might let a Social Security tax cut expire at year's end. Income
tax cuts could expire in 2012.
Based on those assumptions, economists at Bank of America Merrill Lynch expect
growth below 2 percent this year, next year and in 2013.
For most Americans, such weak expansion would feel like a recession.
And it wouldn't reduce chronically high unemployment. The nonpartisan
Congressional Budget Office said last month that the unemployment rate will
remain near 9 percent through the end of 2012.
In his testimony, Bernanke said the Fed is prepared to support the economy. But
he made clear that the Fed's efforts to force down long-term interest rates are
no "panacea for the problems currently faced by the U.S. economy."
"Fostering healthy growth and job creation is a shared responsibility of all
economic policymakers, in close cooperation with the private sector," Bernanke
said.
Yet there is little likelihood of significant help from Congress.
President Barack Obama's $447 billion job-creation bill has run into resistance
from Republicans and even some Democrats in Congress. House Majority Leader
Eric Cantor says the Republican-led House won't vote on Obama's plan in its
entirety.
Cantor said that while Republicans could back portions of the president's plan,
"this all-or-nothing approach is unreasonable."
Obama is sharpening his strategy to blame Republican lawmakers if the bill, or
at least a significant portion of it, doesn't pass by year's end.
The Fed may not be able or willing to adopt further stimulus. David Jones,
chief economist at DMJ Advisors, a Denver consulting firm, said the Fed could
decide at its policy meeting next month to take no further steps, especially
because its past two policy decisions drew an unusually high three dissenting
votes.
The dissenters have opposed the Fed's continuing efforts to force long-term
rates ever lower. They worry about the risk of inflation and shrinking interest
income for retirees and other savers.