WASHINGTON — Federal Reserve Chairman Ben S. Bernanke warned Tuesday that President-elect Barack Obama's nearly $800-billion fiscal stimulus plan can't repair the nation's damaged economy on its own.
To ensure recovery, Bernanke said, Washington will almost certainly have to go back to the idea of buying or guaranteeing financial firms' toxic assets.
The Fed chief signaled that he believed the new administration would have to spend most of what remained of the Bush administration's $700-billion financial rescue package on banks and investment companies rather than on cash-strapped homeowners, as many lawmakers want.
In remarks at the London School of Economics, Bernanke said the spending program being considered by Obama and Congress "could provide a significant boost to economic activity."
But he added that "fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
The comments, coming a week before Obama's inauguration, appeared designed to tug the incoming president's attention away from the glitter of growth-spurring new spending and tax cuts and back to the gritty business of how to clean up the nation's scrambled financial system.
Bernanke's remarks also suggested that, for the first time since the start of the economic crisis in 2007, fissures might open between the White House and the Fed.
Congress approved the Troubled Asset Relief Program last fall with the understanding that the $700 billion would be used to purchase toxic mortgage assets from banks, making it easier for them to raise capital. But the legislation gave broad authority to Treasury Secretary Henry M. Paulson, who concluded that the purchases would take too long and instead used half the money to prop up faltering firms by investing in them.
Analysts say Bernanke is on firm economic ground in pressing for additional help for the financial sector. Although most banks and investment houses appear to have stabilized since last fall and there are more signs of an easing of credit conditions, lending overall remains constrained.
Economists studying the closest analogy to the recent U.S. troubles -- Japan's struggle during the 1990s to come back from the collapse of both its stock and real estate markets -- have concluded that policymakers in Japan erred in not cleaning up their country's banking system.
