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Bernanke: Household spending needed to spur economy

Mar 24, 2012 Sean Albert

A lack of consumer spending and credit activity is holding the economy back from a more robust recovery, says Federal Reserve Chairman Ben Bernanke. Speaking at George Washington University on Thursday, Bernanke said the economy is currently operating below its pre-recession levels due to insufficient household spending. "Consumer spending is not recovered, it's still quite weak relative to where it was before the crisis," Bloomberg quotes the Bernanke as saying. "In terms of debt and consumption and so on we're still way low relative to the patterns before … We lack a source of demand to keep the economy growing." This one of several reasons why the Fed is planning to hold interest rates near record lows for years to come. Analysts hope these efforts will encourage more affordable borrowing and drive economic activity. However, mortgage rates have been fairly low for years, and the housing market remains mired in weak demand, although recent signs have pointed toward the beginning of a recovery. "In response to the deepest recession in generations, the Fed, under Bernanke's leadership, slashed short-term borrowing costs to zero and have promised to leave them there until at least late 2014," Reuters reports. "The central bank has also sharply expanded its balance sheet through the purchase of some $2.3 trillion in Treasury bonds and mortgage-backed debt." But the report comes the same day as a former Fed economists warned that excessive consumer debt is holding back spending and, therefore, the wider economic recovery. Debate remains over what the appropriate solution is. With the presidential election only months away, reports have shown job creation to be the leading issue in the minds of voters. Recent months have shown significant gains in the labor market, but most analysts agree that a these trends need to be able to support heightened spending and housing activity in order to make an impact on economic growth. In his lecture on Thursday, Bernanke pointed out that he did not believe the central bank's low interest rates during the early part of the decade contributed to the housing bubble. However, he did acknowledge that the Fed made a series of regulatory mistakes that played a role in banks' unsound mortgage loans and credit decisions.