The Fed Chairman didn’t give many specifics, but he did lay out the economic challenge in testimony before the Senate today:

Federal Reserve Chairman Ben Bernanke warned Tuesday the “severe” U.S. recession may drag into 2010 unless the government succeeds in stabilizing the banking system and financial markets with strong action.
Delivering a somber assessment to lawmakers, Bernanke said the fast-shrinking economy risked entering a mutually reinforcing cycle of weak growth and financial market strain.
“To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets,” he told the Senate Banking Committee.

There is an argument to be made that the administration would have been smart to tackle the bank bailout first, with a complete and detailed approach. Huge losses and increased instability are the price to be paid for spending weeks on a stimulus plan of questionable economic value and for Tim Geithner’s rocky start. But Bernanke’s emphasis on “stability” in the banking industry seems to have stopped the bleeding in the markets for today. And the Treasury is finally commencing its bank “stress testing” (that’s different from the stress the banks and the market have experienced watching the Treasury flounder), although we still lack clarity as to what the rules of the test are and what happens to those who flunk.

One wonders why the Obama team has fomented all the confusion and lacked a proper appreciation for the destabilizing impact of perpetual vagueness. Let’s hope the administration, and Geithner specifically, have learned their very expensive lesson.