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Bernanke sees US recovery in 2010, banks lift markets

FEDERAL Reserve Chairman Ben Bernanke said the US economy should start recovering from recession next year if there is the political will to complete the costly rescue of the shattered banking system.

Battered US banks showed signs of life last week, with Citigroup, Bank of America and JPMorgan Chase saying they have returned to black early this year and assuring they should ride out the recession without more taxpayer help.

Such signals, combined with pledges by the G20 group of the world's largest economies to boost rescue funds for developing economies in trouble and do all they can to combat the worst downturn since the 1930s, lifted financial markets.

Asian-Pacific stocks outside of Japan rose 1.2 percent, while Tokyo shares climbed 2.4 percent, buoyed by rising bank shares.

"It seems as if overall worry about the US financial sector is fading," said Noritsugu Hirakawa, a strategist at Okasan Securities in Japan.

Japanese shares received an additional boost from a report that the Bank of Japan was considering buying subordinated debt issued by banks to bolster their capital and lend to the world's second-largest economy mired in a deepest slump in decades.

Oil slumped US$2 to US$44 a barrel after OPEC resisted calls for further output cuts and kept its targets unchanged yesterday, out of concern about the health of the world economy.


Bernanke, in a rare interview with CBS programme "60 minutes", largely upheld the Fed's view that there was a reasonable prospect the recession that took hold in December 2007 would end this year and that 2010 would be a year of recovery.

"We'll see the recession coming to an end probably this year," Bernanke said. "We'll see recovery beginning next year."

The Fed chairman said his greatest worry is that lawmakers and the public will withdraw support for efforts aimed at stabilising the shattered banking system.

"The biggest risk is that, you know, we don't have the political will," he said. "We don't have the commitment to solve this problem, and that we let it just continue."

"In which case ... we can't count on recovery."

Revelations yesterday that the American International Group paid nearly as much in employee bonuses as it got in government bailouts and paid billions of dollars to European banks and Wall Street investment firms, were set to test the will of Americans to bankroll the financial rescue.

The embattled insurance giant, which got US$173 billion in federal funds to survive, said it was paying US$165 billion in bonuses to employees in the very division that crippled the company by issuing billions of dollars in derivatives insuring risky assets.

It also disclosed that Goldman Sachs and several European banks were major beneficiaries of US$93 billion in payments it had made to its partners.

Bernanke acknowledged the depth of public resentment against institutions such as the AIG, but argued the financial rescue was necessary to protect the US economy and jobs.

"I care about Wall Street for one reason and one reason only -- because what happens on Wall Street matters to Main Street." The financial system remains fragile, despite a US$700 billion bailout of the banking system approved by Congress in October and US President Barack Obama has said more money will likely be needed to repair debt-laden banks.

Recent economic data have pointed to an intensifying economic downturn. The US unemployment rate rose to a 25-year high of 8.1 percent in February as employers cut 651,000 jobs, taking the recession's job loss total to 4.4 million. Home and auto sales have slid in recent months and manufacturing has contracted.

The US government has been criticised for its efforts to combat the crisis. In particular, its plan to stabilise banks drew fire for lacking details. Treasury Secretary Timothy Geithner plans to detail his plan this week and President Barack Obama is set to announce steps on Monday to make it easier for small business owners to borrow money.

With enough controversy at home Obama dismissed over the weekend suggestions of a growing rift between a Washington, focusing on increased government spending to contain the crisis born out of the US housing market meltdown and Europe stressing new financial regulation as priority.

"I don't know where this notion has emerged that somehow there are sides developing with respect to the G20," Obama told reporters in the Oval Office. "There are no sides."


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