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April 3, 2008

How did the Fed defend its empowerment to bail out Bear Sterns from collapse?


"Bernanke warns US economy could shrink

The US economy will not grow much if at all during the first half of this year and 'could even contract slightly,' Ben Bernanke said on Wednesday, admitting for the first time that a 'recession is possible.'

The chairman of the Federal Reserve said its recent actions – big interest rate cuts and emergency measures to support market liquidity – 'appear to have helped stabilise the situation' in financial markets 'somewhat.' But he said those markets remained under 'considerable stress.'

Amid tough questioning from Democrats, Mr Bernanke defended the decision to intervene to save investment bank Bear Stearns from collapse. The central bank’s rescue of Bear raised 'difficult questions,' he said. But the damage caused by a default 'could have been severe and extremely difficult to contain' with fallout for the real economy as well as the financial system.

He told lawmakers that the Fed’s emergency loan to Bear Stearns followed a warning by the company on March 13 that it would have to file for Chapter 11 bankruptcy the following day."

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