Obama hints at hopes for recovery

Obama hints at hopes for recovery
By Krishna Guha and Edward Luce in Washington
Copyright The Financial Times Limited 2009
Published: April 14 2009 13:55 | Last updated: April 15 2009 00:24
http://www.ft.com/cms/s/0/10f7fa3e-28f2-11de-bc5e-00144feabdc0.html


President Barack Obama said on Tuesday that aggressive efforts to boost the US economy were starting to bear fruit, even though the recession would cause more pain this year.

Confirming a shift in official rhetoric, Ben Bernanke expressed wary optimism that the economy was no longer falling off a cliff. “We have seen tentative signs that the sharp decline in economic activity may be slowing,” the Federal Reserve chairman said.

“A levelling out of economic activity is the first step toward recovery,” he added, although he did not say when he thought this levelling out would take place.

March retail sales figures, released on Tuesday, highlighted the continued fragility of the US economy and raised questions as to whether consumer spending has found a floor following a plunge in late 2008. Sales fell 1.1 per cent from February, with declines in every category apart from food and health. Stocks fell after the report, with the S&P 500 index losing 2 per cent.

In a speech at Georgetown University, Mr Obama said the $787bn stimulus, the $700bn bank recapitalisation programme, $70bn housing plan and extra federal aid to Detroit car companies were “starting to generate signs of economic progress”.

“This is all welcome and encouraging news, but it does not mean that the hard times are over,” he said. While officials in both the US administration and the central bank think the economy will probably bottom out in the second half of this year they remain wary of calling the turn in the economic cycle.

They regard recent signs of green shoots as hopeful but not definitive, and do not want to undermine support for continued extreme fiscal and monetary measures that may still be needed to support growth. Mr Bernanke said: “We will not have a sustainable recovery without a stabilisation of our financial system and credit markets.” He added: “We are making progress on that front.”

Offering his lengthiest defence yet of his administration’s handling of the crisis to date, Mr Obama rebuffed criticism that it was running excessively large deficits, saying the “last thing a government should do in the middle of a recession is to cut back on spending”.

The president, who is 85 days into his administration, said he had used the time to “clear the wreckage” from the economic collapse in order to prevent the recession from getting deeper. But he cautioned against expectations of a rapid recovery. “The severity of this recession will cause more job losses, more foreclosures, and more pain before it ends,” he said.

Both Mr Obama and Mr Bernanke defended the US decision to avoid bankruptcies of large financial institutions, while Mr Obama gave his clearest defence so far of the administration’s decision to avoid nationalising the banks before the results of “stress tests” expected this month. Banks that were shown with insufficient capital in the stress tests would be held accountable and forced to clean up their balance sheets. “Governments should practice the same principles as doctors – first, do no harm,” he said. “We believe that pre-emptive government take-overs are likely to end up costing taxpayers even more in the end . . . because it is likely to undermine rather than create confidence.”