Bleak, bleak, and more bleak -- Federal Reserve chairman Ben Bernanke updated Congress' Joint Economic Committee on the state of the U.S economy on Wednesday morning. He didn't say the word "recession," but he did concede that gross domestic product "could even contract slightly" in the first half of 2008, which would satisfy the technical definition of the word "recession." He concluded: "Clearly, the U.S. economy is going through a very difficult period." Translated through the filter of Fedspeak, that's extraordinarily strong language for the cautious Bernanke.
But the most interesting section was his summary of the events involving Bear-Stearns two weeks ago.
On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available. This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company's failure could also have cast doubt on the financial positions of some of Bear Stearns' thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects 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. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bear's financial obligations.
A chaotic unwinding ... exceptional pressures ... severe and extremely difficult to contain ... We may never know just how close to a crash Wall Street came in March 2008. But we seem to have been within shouting distance, at least.
UPDATE: Responding to a question after delivering his prepared statement, Bernanke did utter the word "recession." As in, a recession is "possible."