Fed chairman says stimulus alone won’t rescue economy

LONDON — A mammoth stimulus package being crafted by President-elect Barack Obama could give the economy a much-needed lift, but other steps must be taken to bolster the wobbly financial system and for any recovery to stick, Federal Reserve Chairman Ben Bernanke said Tuesday.

Specifically, Bernanke suggested the government inject more money into the banking system.

The chairman also offered options to deal with rotten mortgages and other bad assets held by financial institutions, a problem that has contributed to a lockup in lending.

Bernanke also again called for the government to do more to curb home foreclosures.

The Fed chief’s extensive remarks, in a speech at the London School of Economics, come at a critical time as the U.S. gets ready to change its political and economic guard from President George W. Bush to Obama next week.

Bernanke’s idea of giving more federal money to banks, and his mention of the fund’s original intent of buying up their toxic assets, could affect the argument over whether to release the second $350 billion in bailout money. Obama favors broadening the bailout program to help distressed homeowners.

"Bernanke knows there is a debate out there on how to use the second half of the bailout money, and I think his remarks will have some influence on that,” said Michael Feroli, an economist at JPMorgan Economics.

"I think the Obama team … hasn’t ruled out anything in terms of ways to assist the financial sector.”