Federal Reserve Chairman Ben Bernanke painted a gloomy picture of the economy when he testified before the Joint Economic Committee on Capitol Hill. Bernanke told members of Congress that the economic recovery was “close to faltering.” He said that the Federal Reserve had taken great pains to promote economic growth, but it cannot be expected to singlehandedly avert a financial crisis.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” he said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

The underlying theme of Bernanke’s testimony was that America’s economic growth had been diminished by world events such as the earthquake in Japan and the ongoing wrangle over European debt. The economy has also been undermined from within by domestic problems such as the weak housing market and depressed consumer confidence.

“Consumer behavior has both reflected and contributed to the slow pace of recovery,” he said. “Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit.”

Bernanke went on to say that, although prices have risen more sharply than expected over the past year, he expects the situation to stabilize soon. Until now, Bernanke suggested that the economy would recover as long as the government did not interfere. However, in today’s testimony, he appeared to advocate a more proactive role for the government, and he urged legislators to keep four goals in mind when crafting policy.

First, he urged the government to tackle the national debt in the hopes of securing long-term fiscal responsibility. While he welcomed the creation of a Joint Select Committee on Deficit Reduction, he cautioned that much more would need to be done in order to guarantee fiscal sustainability.

Second, Bernanke urged the government to avoid actions that might imperil the economic recovery, such as deep short-term spending cuts. Under the circumstances, legislators could be forgiven for wondering if this was not in conflict with his call to reduce the deficit, but Bernanke assured them that this was not the case.

“These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said. The government’s third goal should be crafting policies that promote long-term growth and economic opportunity.

“As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term,” he said. Finally, Bernanke called on the government to reform its budgeting process. He urged legislators to work out a system that was more transparent and less likely to cause market disruptions due to partisan wrangling.

Bernanke’s comments come amidst mounting pessimism regarding the state of the US economy. Last week, the Economic Cycle Research Institute warned its clients that America was headed toward a new recession. “If you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street,” they said.
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