From the Fed Chairman, Red Flags and Brown Socks

Federal Reserve Chairman Ben Bernanke could not have sounded the alarm any clearer if he had carried a bullhorn and a gong. "This expansion of debt would spark a fiscal crisis. . . . The U.S. economy could be seriously weakened. . . . This is sort of like a snowball rolling down the hill. . . . This can really get out of control."

Before Bernanke began his testimony to the House Budget Committee yesterday, the Dow Jones Industrials stood at 12,200. In the half-hour it took him to issue those dire warnings, the index climbed 150 points.

Investors, of course, weren't reacting to Bernanke's wailing and gnashing of teeth about a looming fiscal crisis; the projected collapse of Medicare and Social Security is still a few years away. After Tuesday's worldwide stock sell-off, the markets -- and the lawmakers -- wanted Bernanke's short-term forecasts for the economy, which were mostly sunny.

Chairman John Spratt (D-S.C.) fretted about the "severe disruption in the stock markets." The ranking Republican, Paul Ryan (Wis.), also wanted to hear about the "precipitous drop."

Bernanke, who said nothing about the stock market in his opening testimony, obliged. "There is really no material change in our expectations for the U.S. economy," he assured the lawmakers. "We are looking for moderate growth in the U.S. economy going forward."

The hearing had been billed as a discussion about "Fiscal Challenges and the Economy in the Long Term." But then came Tuesday's stock swoon -- caused in part by Bernanke's famous predecessor at the Fed, Alan Greenspan, who said on Monday that he saw signs of recession coming late this year. That forced Bernanke into the role of market soother.

"Do you believe or agree that there is a liquidity problem in the world today?" Ryan asked him.

"No, I don't think so," Bernanke answered.

"Some also have been pointing to a concern about subprime lending," Ryan continued.

"We don't see it as being a broad financial concern."

The wires rushed out bulletins:

"Fed Economic View Unfazed by Stocks Drop"