Yesterday, Federal Reserve Chairman Bernanke gave a speech at an event hosted by the London School of Economics addressing the present financial crisis and the Federal Reserve’s response. This was the first major policy speech he has given since early December.

Chairman Bernanke warned the incoming Administration and Congress that the adoption of a fiscal stimulus package will not likely “promote a lasting recovery” unless it was “accompanied by strong measures to further stabilize and strengthen the financial system.” Noting that the Federal Reserve still “retains a number of tools that can be deployed against the crisis,” Chairman Bernanke further stated that “[t]he Federal Reserve will do its part to promote economic recovery, but other policy measures will be needed as well.”

In his speech, the Chairman outlined a number of “extraordinary actions” the Federal Reserve had taken since the onset of the crisis to “ensure that financial institutions have adequate access to short-term credit,” including the creation of a Term Asset-Backed Securities Loan Facility, GSE and MBS Repurchase Program, Money Market Investor Funding Facility and Commercial Paper Funding Facility. He also proposed three alternative ways for removing troubled assets from a financial institution’s balance sheet if the U.S. Treasury did decide to move forward as initially proposed in Emergency Economic Stabilization Act of 2008: purchasing the assets publicly; providing “asset guarantees,” and capitalizing troubled financial institutions and purchasing their assets in exchange for cash and equity.

Chairman Bernanke concluded his statements by urging for the implementation of a “new set of procedures for resolving failing nonbank institutions deemed systematically crucial” within the U.S. financial system.

During the House Financial Services Committee hearing on “Priorities of the Next Administration: Use of TARP Funds under the Emergency Stabilization Act of 2008” held yesterday, Federal Reserve Vice Chairman Donald L. Kohn echoed many of Chairman Bernanke’s sentiments, and recommended that “the bulk of remaining TARP funding be devoted to strengthening financial institutions, thereby supporting the normalization of credit markets and the flow of new credit.”