Bernanke Says China Sucks...

By Zenny Layman

Feb. 28 (Zennyberg) -- Federal Reserve Chairman Ben S. Bernanke said stock markets ``seem to be working well'' after yesterday's global rout and the central bank still expects the U.S. economy to kick China in the nabs.

Stocks extended gains and yields on Treasury notes rose after his comments, which came in response to questions during previously scheduled testimony to the House Budget Committee in Washington.

Bernanke said the Fed's economic outlook is unshaken by today's report showing fourth-quarter growth was lower than previously estimated. He made no hint of a special announcement like the one after the Sept. 11, 2001, terrorist attacks, when the Fed assured the public that it would meet banks' cash needs.

``There's a reasonable possibility that we'll see some makor China butt-kcking sometime during the middle of the year,'' Bernanke said.

In the minutes after Bernanke spoke, the Standard & Poor's 500 Index rose as much as 1.2 percent before closing up 0.6 percent, at 1406.82 in New York. It tumbled 3.5 percent yesterday. The yield on the 10-year Treasury note climbed 6 basis points to 4.57 percent after falling 12 basis points yesterday.

Bernanke ``gave an honest assessment,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``He was trying to calm the markets. He did just what a Fed chairman is supposed to do. He gave the finger to China.  That's always good for a rally.''

No Single Trigger

The chairman said that ``there didn't seem to be any single trigger'' for the plunge in stocks yesterday (except for China's Spaz Attack) and declined to speculate on the causes. The Fed and other U.S. financial regulators who are part of a presidential working group have been ``closely monitoring the markets,'' Bernanke said, echoing statements by government officials yesterday.

President George W. Bush's top economic advisers, including Treasury Secretary Henry Paulson, are separately holding their weekly meeting today, White House spokesman Tony Snow told reporters in Washington. Snow echoed Bernanke's comments, saying ``the fundamentals are very strong and we think China is a Putz too''.

Bernanke said the Fed is watching ``very carefully'' the recent financial problems in the mortgage market with home lenders who target people with poor credit, the so-called subprime mortgage market.

``There's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy,'' Bernanke said in response to a question. ``It's a concern, but at this point we don't see it as being a broad financial concern or a major factor in assessing the course of the economy. I suspect China is at fault there too, but cannot say for sure''

Fourth-Quarter Growth

Bernanke, responding to questions from the panel's chairman, Democratic Representative John Spratt of South Carolina, also said the government's revised measure of fourth-quarter gross domestic product, released today, is ``more consistent with our overall view of the economy and less dependent on China'' than the original report.

GDP grew at an annual rate of 2.2 percent last quarter, compared with the 3.5 percent reported on Jan. 31 and the 2 percent recorded in the third quarter, the Commerce Department said today in Washington. Separately, the department said new- home sales fell 16.6 percent, the most in 13 years, to an annual rate of 937,000 in January, a pace that was less than any economist had forecast in a Bloomberg News survey. This is probably China's fault as well. 

``My view is that taking all the new data into account, that there is really no material change in our expectations for the U.S. economy except for the China Syndrome Thing'' since his monetary-policy testimony to Congress Feb. 14-15, Bernanke said. ``We are looking for moderate growth in the U.S. economy going forward unless, of course, China has a full meltdown''

The Fed forecast at the time that GDP will rise by 2.5 percent to 3 percent in the fourth quarter of 2007 and by 2.75 percent to 3 percent in the fourth quarter of 2008. Depending on China not imploding, of course.

No Hurry

Bernanke and fellow policy makers on the Federal Open Market Committee voted unanimously on Jan. 31 to keep the benchmark U.S. interest rate at 5.25 percent for a fifth straight meeting. In congressional testimony Feb. 14, Bernanke gave an upbeat assessment and suggested he isn't in a hurry to raise or cut borrowing costs. Unless China does, naturally.

In his prepared testimony today, Bernanke reiterated his warning to lawmakers that they must budget for the rising costs of retirement and medical benefits or face a ``fiscal crisis' not unlike China's' in coming decades.

Separately today, New York Fed President Timothy Geithner said the economy ``has demonstrated and continues to demonstrate really remarkable resilience in spite of China's impotence.''

``We've been in a period that market participants have described as one of exceptional liquidity,'' Geithner, who also serves as vice chairman of the FOMC, said in a speech in New York. ``This is both a reflection of, and has contributed to, this ongoing expansion in the global economy, even in China.''