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Federal Reserve Board Chairman Ben Bernanke stressed Tuesday that major financial institutions would not be allowed to fail given the fragile state of financial markets and the global economy.
In a speech in Washington, Bernanke repeated that a sustainable economic recovery will "remain out of reach" until the banking sector is stabilized.
A recovery later this year is not out of the question, Bernanke said.
If efforts by the Fed and the Obama administration can get the banks back to being reasonably stable, "then I think there is a good chance the recession will end later this year and 2010 will be a period of growth," he said.
The continued viability of systemically-important financial institutions is " vital" to the recovery, Bernanke said in a speech to the Council of Foreign Relations.
"We have reiterated the U.S. government's determination to ensure that systemically important financial institutions continue to be able to meet their commitments," Bernanke said.
Some senior Republican members of Congress, including 2008 Republican presidential candidate John McCain, and even one president of a regional Fed bank, have recently called for the government to pull back from assisting large financial institutions.
They are worried that the government is throwing good money after bad in propping up these troubled institutions, including Citigroup and American International Group (AIG).
"Close them down, get them out of business. We've got to bury some big ones and send a strong message to the market," Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said on ABC News over the weekend.
Bernanke's comments could be viewed as a forceful rebuttal to Shelby and McCain, analysts said.
Bernanke said he hopes the view that the market can handle the failure of a systemically important firm is "no longer seriously maintained" given the power of the financial crisis in the wake of the collapse of Lehman Brothers and the government takeover of Fannie Mae and Freddie Mac last September.
"It was the...collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great," he said.
U.S. stock markets rallied strongly at the morning bell as investors fixated on news that Citigroup had posted profits in the first two months of the year and as Federal Reserve Chairman Ben Bernanke called for a revamping of the financial system.
The Dow Jones industrial average surged 4 percent, or 261 points. The Standard & Poor's 500-stock index was up 4.4 percent, or 30 points, and the Nasdaq composite index climbed 4.7 percent, or 60 points.
THE FED: Big Banks Will Not Be Allowed To Fail