Bernanke Sees 'Sluggish' Turn

Federal Reserve Chairman Ben Bernanke seemed to answer the question he's been asking since he took the helm of the Federal Reserve last February: Can the housing market recession pull the entire economy into contraction?

His answer seems to be finally that yes, it definitely could, though he refrained in his testimony to the Joint Economic Committee of Congress Thursday morning from explicitly discussing the prospects of a full-blown recession.

He says in his prepared testimony that delinquencies on mortgages "are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets."

"The contraction in housing-related activity seemed likely to intensify," he adds, and "house prices might weaken more than expected which could further reduce consumers' willingness to spend." That means the strong 3.9% GDP growth in the third quarter is "not likely to be sustained in the near term," due to tighter lending standards for all types of credit to both individuals and businesses.

The gist of Bernanke's testimony tilts toward the notion of stagflation, or the toxic combination of slow growth due to the housing market and credit market turmoil compounded by high raw materials prices, such as nearly $100 oil, and a weak U.S. dollar.

To summarize, the chairman said that the Fed sees growth as "remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."