Indeed, Mr. Bernanke suggested that Mr. Obama might want to revive the original idea of the rescue plan to buy unsellable mortgage-backed securities and other illiquid assets. That idea was originally the centerpiece of the program as it was first promoted by the current Treasury secretary, Henry M. Paulson Jr. Mr. Paulson abandoned the idea before getting started, arguing that it would be faster and more efficient to inject capital directly into the biggest banks and investment firms.  In a separate appearance on Tuesday in Washington, the Fed’s vice chairman, Donald L. Kohn, said that financial institutions were still “clogged” by hard-to-sell assets and still needed help.  Mr. Bernanke supported the efforts by Congress and President-elect Obama to put together a fiscal stimulus program worth roughly $800 billion over two years that would be weighted heavily toward big new spending on infrastructure projects, like bridges and schools, “green” energy projects, and expanded safety-net programs like unemployment benefits.  Both Mr. Kohn and Mr. Bernanke seemed to be warning lawmakers that they could not focus exclusively on comparatively popular spending and tax-cut programs.  A stimulus package relying on extensive borrowing “could provide a significant boost to economic activity,” Mr. Bernanke said. But “fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.”  Beyond buying troubled assets from banks, Mr. Bernanke said, another option is to provide asset guarantees under which the government would absorb part of the banks’ losses in exchange for warrants or other forms of compensation. He also expressed support for the idea of creating a so-called bad bank that would allow the government to buy financial assets in exchange for cash or equity.  Mr. Bernanke said the Fed had already done a great deal to help stimulate the economy — like lowering its benchmark interest rate to virtually zero in December — but that it still has “powerful tools” at its disposal.  It could help lower mortgage rates by buying longer-term securities, Mr. Bernanke noted. Other tools include further lending to financial institutions and providing liquidity to investors against triple A-rated securities that are backed by recent consumer and small-business loans.  He argued that the Fed’s approach is different from the quantitative easing policy used by the Bank of Japan from 2001 to 2006 and should be described as credit easing. Even though both methods involve the expansion of the central bank’s balance sheet, the Fed’s focus is on reducing credit spreads that are much wider in the United States now than was the case in Japan.  In his remarks, Mr. Bernanke also sought to calm concerns that the Fed’s actions will fan inflation by effectively printing money. Risks of inflation remain low in the near term, he said but added that once the credit markets begin to recover the Fed will have to unwind its lending programs.  “To some extent, this unwinding will happen automatically,” he said, and short-term assets can just be allowed to “run off.” Still, the Fed might hold on to some of the longer-term assets for a while, which could slow down efforts to shrink its balance sheet.  The Fed chairman reiterated the need for “stronger supervisory and regulatory systems” while being careful not to introduce rules that would “forfeit economic benefits of financial innovation and market discipline.”  “Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises,” he said.  Julia Werdigier reported from London and Edmund L. Andrews from Washington.
More capital injections into the banking sector might be needed for a long-term recovery, the Federal Reserve chairman said.