Bernanke should embrace the 'R-word'

The Federal Reserve chairman could inspire more confidence if he just admitted the economy is in recession and that he has a plan to get us out of it.

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By Paul R. La Monica, editor at large

Bernanke says a recession is possible. Do you agree?
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NEW YORK ( -- George Carlin famously joked about seven dirty words you're not supposed to say. Federal Reserve chairman Ben Bernanke has apparently added a word to that list: recession.

Bernanke testified in front of Congress' Joint Economic Committee today and in his nine-page statement, the word "recession" did not appear.

Sure, he came very close to describing the economy in terms that sound an awful lot like a recession, saying that "real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly."

And during a question and answer session, he finally admitted that "a recession is possible" but stopped short of saying we're in one now.

But wouldn't it actually be a little more reassuring if Bernanke explicitly admitted that the United States is either perilously close to slipping into recession or is even already in one?

Many economists think we're already there. The weak housing and job markets, plunging consumer confidence and sluggish activity in the manufacturing and services sector paint a picture of an economy that is in decline.

But Bernanke shouldn't have to fear that saying we're in a recession is an admission of defeat. Recessions are inevitable parts of economic cycles. In fact, if Bernanke would just embrace the R word, the actions the Fed have taken in the past few months could be seen in a more encouraging light.

The central bank has slashed interest rates several times, even though it risked further weakening the dollar and fanning inflation flames by doing so. We've seen a huge run-up in the price of commodities such as oil and gold this year and the Fed's cuts are partly to blame.

The Fed has also injected hundreds of billions of dollars into the financial markets to try and alleviate the credit crunch. In addition, the Fed helped arrange a "takeunder" of Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) to keep Bear Stearns from going bankrupt.

Some would argue that these actions are merely another example of the Fed bailing out rich Wall Street types.

Bernanke did argue in his testimony today that saving Bear Stearns has implications beyond Wall Street, suggesting that "the damage caused by a default by Bear Stearns could have been severe and...would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."

But Bernanke could go further. If he stated the obvious, he could go on to remind everyone that recessions, when the Fed is on top of monetary policy during one, are usually mild and brief.

According to the National Bureau of Economic Research, the 2001 recession lasted 8 months. So did the 1990-1991 recession. On average, the 10 recessions in the past 60 years have lasted just 10 months.

So if this recession began in late last year, as many suspect, then we could be close to being halfway out of it.

Bernanke hinted as much in his testimony today. He said the Fed expects the economy to strengthen in the second half of the year and into 2009 thanks in part to the Fed's six rate cuts since last September and the economic stimulus package passed by Congress this year that will soon lead to tax rebate checks for many consumers.

So stopping short of saying we're in recession just seems silly. The mark of a good Fed chairman is not whether he can keep the United States out of recession indefinitely but the actions he takes when the economy is in recession to prevent it from being long and deep. But Bernanke needs to admit we're in one first before the market can have any faith in him being able to get us out of it.

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