Crisis in U.S. to get worse than expected?

by Jin Minmin, Zheng Kaijun

BEIJING, March 4 -- U.S. Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that efforts were needed to avoid "a prolonged episode of economic stagnation", fueling investors' fears that the current recession might take longer than expected to recover.

An economic recovery depended on the government's ability to stabilize financial markets, and the banking system has not yet stabilized by now, said Bernanke.

STOCK MARKETS FALL

Bernanke's comments, compounded by the American International Group Inc. (AIG)'s loss of another 61.7 billion U.S. dollars in the fourth quarter of last year, which was announced on Monday, has added to investors' worries and led to falls in global stock markets.

In Tuesday's trading, the Dow Jones fell another 37.27, or 0.6 percent, to 6,726.02, its lowest close since April 21, 1997, down 52 percent from its record high of 14,164.53 in October 2007. The S&P 500 index dropped 4.49, or 0.6 percent, to 696.33, and the Nasdaq composite index also slid 1.84. or 0.1 percent, to 1,321.01.

Along with the U.S. indexes, global stocks also continued to fall in the wake of Bernanke's remarks.

National benchmark indexes slid on Tuesday in all of the 18 West European markets except Austria. The UK FTSE 100 lost 3.1percent, Germany's DAX slipped 0.5 percent and France's CAC 40 dropped 1 percent. Japanese Nikkei 225 Stock Average also declined 82.32, or 1.1 percent, to 7,147.40 as of Wednesday morning.

OPTIMISM WANES

Many U.S. investors have now started to sell their stock shares to buy assets such as state bonds which are less profitable but more stable, bringing the U.S. Dollar Index to a three-year high, an indication the dollar is appreciating against other major currencies.

At the beginning of this year, most forecasters predicted a global economic recovery in the second half of this year, hoping that the stock market, a barometer of the economy, might bottom in the first half of the year, well before the economy.

However, contrary to most economic analysts' forecasts, 14 U.S. banks closed down in the first two months of the year. The bankruptcy of Lehman Brothers last September has pushed many investment banks to the brink of collapse.

Since the beginning of this year, commercial banks have also been struggling in the financial turmoil as the situation deteriorates. Banking giants including the Bank of America and Citibank are seeking government bailouts, substantiating Bernanke's judgment that the banking system is still in a readjustment period.

"The global recovery that we expected in the last forecast to begin at the end of 2009 -- or at the beginning of 2010 -- is now delayed into 2010, providing that the right policies be implemented," said International Monetary Fund Managing Director Dominique Strauss-Kahn Tuesday at the Brookings institution, a Washington DC.-based independent research and policy organization.

RECESSION OR DEPRESSION?

The AIG's record high quarterly loss has shocked the federal government who immediately announced an injection of 30 billion dollar into it, a fourth attempt to save the ailing insurance giant.

But Wall Street cautioned against optimism, worrying that financial institutions may get into the habit of relying on federal assistance. There is also rising concern that these institutions would not be strong enough to stand on their own when much of the stimulus package is used next year.

"The shuttering attempts to repair the banking and lending mechanisms so far by the new administration suggests that by late 2010, the specter of a second dip into recession will be looming large," said Merrill Lynch economist Sheryl King.

The financial crisis is leeching into the U.S. real economy. According to Bernanke, business shed 600,000 jobs in January and the unemployment rate jumped to 7.6 percent. Households have continued to rein in their spending, home sales kept declining and manufacturing sector deteriorated further.

The talk a year earlier of a potential "recession" has now given way to that of a "depression," analysts said.

"We are probably in a depression now," said Peter Morici, a business professor at the University of Maryland.

A depression is a recession that "does not self-correct" because of fundamental problems in the economy, such as an enormous trade deficit and banks that go bankrupt, Morici explained.

The continuous plummeting of the U.S. stocks, together with poor economic performance in other sectors of the economy, reflects considerably low investor confidence in the recovery prospects for the world's largest economy.

Whether or not the U.S. will sink into depression, "It's not going to be acknowledged until years go by," said Morici.