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"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for growth in the near term appear good," Bernanke said, in a speech at an economic symposium sponsored by the Kansas City Fed. Bernanke laid out a broad defense of the central bank's actions in the financial crisis Friday morning, arguing that the extraordinary interventions of the Fed and its counterparts around the world averted global catastrophe. Bernanke said that the financial crisis that deepened in September "sparked a deep global recession, from which we are only now beginning to emerge." "History is full of examples in which policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs," Bernanke said. "In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation." The speech is part of a broader effort by the Fed chairman to remind Americans of how dark the days of last fall were -- and to take some credit for helping to prevent a much worse economic calamity. Bernanke is trying to defuse anti-Fed sentiment on Capitol Hill and among the public. He also defended the Fed's actions, which include a wide range of unconventional lending programs, in an unusual town hall-style special on PBS last month. Bernanke's term ends Jan. 31, and President Obama will decide in the coming months whether to reappoint or replace him.Stocks rallied Friday on Bernanke's remarks about the recovery, as well as housing data released from the National Association of Realtors showing that July existing home sales surged 7.2 percent. The Dow Jones industrial average was up 1.45 percent in mid-morning trading. "As severe as the economic impact has been," he said, "the outcome could have been decidedly worse," said Bernanke, a scholar of the Great Depression. "Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year, monetary, fiscal and financial policies around the world have been aggressive and complementary." Bernanke tried to cast the Fed's actions -- which include a range of unconventional programs to stimulate lending in various markets -- as descendants of a long history of central banking strategy. Citing Walter Bagehot, the 19th-century British father of modern central banking, Bernanke argued that the failure of Lehman Brothers and near-failure of numerous other financial firms was "a classic panic." In a bank run of the sort Bagehot described, investors all try to pull their money out of a bank at once, causing the bank, which lends money out on a long-term basis, to fail. To combat bank runs, central banks have long offered to make emergency loans to institutions suffering an immediate crunch. The Fed, Bernanke argued, has extended that strategy to markets and institutions other than traditional banks: money market mutual funds, commercial paper, investment banks and others. "The view that the financial crisis had elements of a classic panic, particularly during its most intense phases, has helped to motivate a number of the Federal Reserve's policy actions," said Bernanke. "Bagehot instructed central banks -- the only institutions that have the power to increase the aggregate liquidity in the system -- to respond to panics by lending freely against sound collateral."
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