My outlook calls for the beginning of a recovery in the second half of 2009. I do not expect a strong recovery, but I do expect the economic contraction we're now experiencing to give way to slow and tentative growth as early as the third quarter.

I am fundamentally optimistic about our economy. Among its many intrinsic strengths are universities and colleges like Morehouse, which help talented students gain not only a command of a body of knowledge but also the capacity to think creatively and independently. Institutions like this one train the professionals, entrepreneurs, and leaders who will shape our economy in the future. Today's economic conditions are difficult, but the foundations of our economy are strong, and we face no problems that cannot be overcome with insight, patience, and persistence. The Federal Reserve will certainly do its part to help restore prosperity and opportunity to our economy.

I expect economic conditions to stabilize by the end of the year and then begin to recover next year as the fiscal stimulus boosts spending and as we work off excess inventories.

Once under way, the pace of the expansion is likely to be subdued for a time. There is historical precedent for this, since the recovery of the early 1990s was initially quite modest, as was the recovery earlier this decade. More importantly, in view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build. But with the passage of time—as we get into the middle of 2010 and beyond—I would expect to see a resumption of healthy growth.

Our task is to turn the current "annus horribilis" into an opportunity, just as the Brits did 350 years ago—to emerge from the current economic wreckage stronger and better and more resilient than ever. If England could do it in the 17th century, we Americans, who face a far lesser challenge and have never, ever flinched from staring down and overcoming adversity, can certainly do it now. Turning something "horribilis" into a thing that is "mirabilis" is the American thing to do.

Viewed from this perspective, the current economic and financial predicament represents a potential gold mine rather than a mine field. Historically, great investors have made their money by climbing a wall of worry rather than letting a woeful consensus cow them.

Asked if he's seeing any progress, Bernanke said, "I think all of our efforts, so far, have produced results. We're buying about $500 billion in mortgages, in package and securities by the G.S.E.s, Fannie Mae and Freddie Mac. And that seems to have brought down mortgage rates significantly. It allows people to refinance. To get out of high rate mortgages. We are seeing progress in the money market mutual funds, and in the business lending area. And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back."

"Do you see green shoots?" Pelley asked.

"I do. I do see green shoots. And not everywhere, but certainly in some of the markets that we've been functioning in. And we've seen some improvement in the banks, as well," Bernanke said.

I have been predicting an upturn in the overall economy beginning in the second half of 2009, with a slow and gradual return to our full economic potential. To temper that outlook a bit, uncertainty remains unusually high, and one has to be mindful of very real downside risks, including a further deterioration in real estate.

With the economy likely to shrink significantly in the first half of this year, the unemployment rate rising higher than 8.5 percent is, unfortunately, very likely.
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I believe that below-potential growth is likely to persist until financial markets and financial institutions can resume more normal functioning.  So in addition to the other steps being taken to stimulate the economy, we need to be sure that actions to support the stability of the financial system are taken without delay – and, in the slightly longer term, that regulatory frameworks are thoughtfully reformed.

As I look ahead, signposts on the road to recovery include sustained normalization in credit markets and stabilization of house prices. Also, I'm watching for an uptick in business spending to give a sign of a return of opportunity seeking and private sector risk taking needed to sustain growth.

The only description of recent economic developments I have heard that is as cogent came from a woman who, having just commiserated with her accountants, put it this way: "This has been like the divorce from hell: My net worth has been cut in half and I'm still stuck with my husband." The mood and pace of the economy have shifted from near bliss to acrimony and an almost palpable sense of betrayal. Our self-confidence has gone wobbly. Many of our fellow citizens feel trapped in an unsustainable situation. The challenge facing the new president is daunting.

Despite its length, though, I don't expect this recession to necessarily rival the deep recession in the early 1980s in terms of unemployment. In the early 1980s, the unemployment rate rose above 10.5 percent. I do not expect the unemployment rate to stray into double digits during this recession. Yet, I also don't expect it to begin coming down soon. Keep in mind that unemployment is a lagging indicator. It will not begin to come down until after the economy is well on its way to recovery.

I think we're going to have a rough couple of quarters here and then a slow recovery.

I expect real GDP to decline for 2009 as a whole and to rise at a pace in the neighborhood of potential growth during 2010. However, this growth will not be strong enough to close the resource gaps emerging over this period. Indeed, the unemployment rate—the main resource gap measure in the labor market—is likely to rise into 2010.

(T)here is reason to think that improvement is not too far off. Interest rates are low and financial conditions are improving, albeit unevenly. A major fiscal stimulus package is in the offing, which seems likely to add to aggregate demand in a timely way unless consumers and businesses turn exceedingly cautious. Moreover, adjustments which typically occur in a contraction ultimately help to lay the foundation for renewed growth.

The proximate cause of the financial market turbulence, of course, is the home mortgages made from late 2005 through early 2007, near the end of long U.S. housing boom that began in 1995...

It will take years of research to untangle the quantitative contribution of various causal factors to the decade-long housing boom, the accompanying rise in subprime mortgage lending, and the subsequent increase in mortgage losses. A definitive assessment is too much to ask at this point, but a list of the most plausible suspects can easily be discerned. One candidate that is often overlooked is the significant increase in productivity growth, and thus growth in real household income, which began around 1995 and lasted until some time earlier in this decade...

Another plausible contributing factor was the wave of technological innovation in retail credit delivery, which allowed lenders to make finer distinctions between potential borrowers. This facilitated lower interest rates for some borrowers and an expansion of lending to borrowers formerly viewed as unqualified for credit...

The regulatory and supervisory regime surrounding U.S. housing finance also seems likely to have contributed to the boom in housing and housing finance. Here, several factors deserve mention...

Another key causal suspect is the relatively low path of interest rates after the recession earlier this decade, especially in 2003 and 2004. Some economists have argued, with the benefit of hindsight, that tighter monetary policy during that period would have led to better outcomes by preventing core inflation from rising, thus limiting the housing boom and mitigating the subsequent bust. This view strikes me as quite plausible, but again, further research will be required to substantiate this hypothesis.