Bernanke suggests creation of bad bank

Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth.

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke, 55, said in the text of a speech at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

Bernanke’s speech indicates he sees further government aid to the U.S. financial system as essential to an economic recovery. The U.S. Treasury has already channeled $350 billion in taxpayer funds to recapitalize banks and other financial institutions, while the Federal Deposit Insurance Corp. has guaranteed principle and interest payments on $111.2 billion in bonds issued by financial companies.

The Fed chairman recommended three approaches on troubled assets. Public purchases of the bad assets are one possibility, as was originally planned under U.S. Treasury Secretary Henry Paulson’s Troubled Asset Relief Program, the Fed chairman said.

The government could also agree to absorb, in exchange for warrants or a fee, part of the losses on a specified portfolio of troubled assets, he said. Regulators used that method recently with Citigroup Inc.

Another measure “would be to set up and capitalize so- called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad banks,” he said. Finally, efforts to reduce preventable foreclosures “could strengthen the housing market and reduce mortgage losses” and increase financial stability, Bernanke said.

The Fed chairman said the U.S. central bank still has powerful tools to influence growth and prices.

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Bernanke is a bad bank.