Banks will need more capital, says Bernanke in London

Further massive injections of capital may be necessary to save the global banking system from collapse, US Federal Reserve chairman Ben Bernanke warned today.

Nicknamed Helicopter Ben for his belief that dropping huge amounts of public money into the economy is the best way to fight deflation, Bernanke told the London School of Economics that lower interest rates won't be enough to stave off a depression.

"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilise and strengthen the financial system," he said. "More capital injections and guarantees may become necessary to ensure stability and the normalisation of credit markets."

He also discussed the idea of creating a so-called "bad bank" — a government-controlled entity that would hold all of the toxic debts Wall Street banks and other lenders have sitting on their balance sheets.

In London to deliver the Stamp memorial lecture, Bernanke said that these "hard-to-value" assets are one reason why a lack of confidence permeates the global economy, inhibiting new lending. Placing these assets in one publicly-owned bank could be a solution, he argued.

The US Treasury has already funnelled $350 billion to rescue the likes of Citigroup and AIG. A similar amount looks likely to follow.

The Fed chairman said that funding banks even while other industries received little or no assistance was "unappealing (but) unavoidable".

Bernanke said that the damage to the economy from the financial crisis is "already substantial". But he warned it will get much worse unless serious action is taken soon.

Bernanke succeeded Alan Greenspan as head of the Fed in 2006. He is known as an expert on the causes of the Great Depression — and perhaps on how to avoid another one.

Bernanke is the fourth most powerful person in the world, according to Newsweek magazine.