Obama vows tighter control over bailout funds

By Herbert Lash

NEW YORK (Reuters) - U.S. President-elect Barack Obama promised tighter control on Tuesday over a remaining $350 billion in bailout funds and the Federal Reserve chief warned that government spending alone cannot ensure a full recovery.

Efforts to unlock the second half of a $700 billion U.S. financial rescue package came as Germany unveiled a stimulus package -- its second in as many months -- aimed at softening the blow from the worst recession there since World War Two.

Obama won over some lawmakers who had threatened to block the release of funds whose urgent need was highlighted by data showing the biggest contraction in the U.S. trade deficit in 12 years -- a clear sign of a fast weakening global economy.

But Obama's hopes to hit the ground running after he is sworn in next week ran into trouble as new doubts emerged over Timothy Geithner, his pick for Treasury secretary, and negotiations in Congress over the bailout funds.

Geithner was tripped up by news of a housekeeper who worked briefly for him without proper immigration papers and several years when he did not pay Social Security and Medicare taxes for himself.

Federal Reserve Chairman Ben Bernanke said while fiscal stimulus could provide a "significant boost" to the economy, the government may need to inject more capital into banks. A large quantity of distressed assets on bank balance sheets has made raising capital for lending purposes difficult, he said.

"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," Bernanke said in a speech at the London School of Economics.

The U.S. Treasury has injected $271.7 billion in 257 banks so far, but it will take time for the capital to have the desired effect of making credit more available, said Neel Kashkari, who is charged with administering the $700 billion rescue plan.

The stimulus plan is not risk-free, credit ratings agency Standard & Poor's warned on Tuesday. S&P affirmed its "AAA" rating for the United States, but noted risks to its top sovereign grade have increased since the global crisis deepened in September.

While the United States has benefited from an "exceptionally" flexible economy and the dollar's status as the world reserve currency, S&P said "risks to the U.S. credit profile do exist and we judge these to have risen since September 2008."

In particular, S&P said "the deepening financial turmoil and related global macroeconomic downturn will lead to noticeable deterioration in the U.S. fiscal profile."

S&P estimated the total U.S. government deficit at local, state and federal levels will double in 2009 from 5 percent of GDP in the fiscal year ended in September 2008.

The United States racked up a record $485 billion budget deficit for the first three months of fiscal 2009, exceeding the $455 billion gap for the previous fiscal year, the Treasury said.

Declining trade volume reported around the world on Tuesday provided fresh evidence of the scope of the economic slowdown.

The U.S. trade deficit shrank nearly 29 percent in November, the largest drop in 12 years, as weak consumer demand and plummeting oil prices caused a record decline in imports.