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HOUGHTON - The current economic slump will continue for the near future, following the example of the early 1990s, Minneapolis Federal Reserve Bank President Gary Stern said Thursday during a visit to Michigan Technological University.

"... For the near term, we should anticipate further declines in employment and softness in most components of demand for goods and services, together with a diminution of inflation as the bulge in energy and other commodity prices is apparently behind us," said Stern, whose bank is one of 12 in the national system.

Stern spoke to groups of Tech students, capping his visit with a speech before the Houghton Rotary. A friend of Tech professor Jim Gale, Stern was making his third appearance at the Tech campus.

He discussed the Treasury's recent steps to fix the economic situation, as well as possible steps to prevent things such as the housing bubble, cited as a leading cause of the crisis.

Stern supported the $700 billion bailout package, as well as the $250 billion in capital injections to banks. He said the measures were necessary to deal with the current crisis, which he called "a major financial shock, the biggest since the 1930s."

"It's not that all these actions don't have consequences, but we've got to deal with the crisis first, and worry about the secondary repercussions later," he said in an interview with the Gazette.

The Treasury has acted to restore liquidity to institutions that had seized up. They've done this by easing credit to borrowers, Stern said, as well as developing new ways of rolling it out, such as auctioning it off, as well as entry into the commercial paper market.

"The Federal Reserve has responded to unprecedented times with unprecedented actions," he said.

The bailout plan allows for a flexible response to the situation, which is appropriate, Stern said in response to a question at the Rotary meeting.

"Knowing what the appropriate medicine is, the appropriate dose, is hard to know in advance," Stern said. "This isn't a 'take two aspirin and go to bed' situation. It's much more challenging and complex."

Stern said banks in his district are unlikely to fail.

"I don't anticipate that we're going to have lots and lots. Most of the banks in the district are not only in good shape, they've been conservatively managed, so are likely to remain in good shape," he said.

While the financial shock was the largest since the Depression, Stern said the better historical comparison may be to the "brief, but not especially mild" recession of the early 1990s. Even after the 1991 upturn, Stern said, the unavailability of credit slowed the expansion for one to three years. Still, he said, the economy was able to get out of it.

"If you think about the whole decade, that was a very good decade for the U.S. economy in almost all measures," he said.

There are some crucial differences, he said, as the economy was stronger than that of the early 90s before the downturn. The underlying flexibility and and resilience "should ultimately prevail to restore solid growth," he said.

One possible repercussion of the bailout is that buying the now near-worthless securities from creditors will encourage them to resume their previous high-risk actions. Stern said handling the "too big to fail" problem requires building in the proper incentives for sound practices.

"If creditors believe they're going to be bailed out, they have no incentive to price risk appropriately," he said during the interview.

At his Rotary talk, Stern called for a program of "systemic focused supervision," which would identify potential vulnerabilities, create greater communication, and would also have regulators close financial institutions before their problems impact peers.

Stern said steps should be taken to identify asset price bubbles as they form, such as the one recently seen in the housing market, and take action against them.

"The central bank must have public support for the actions it pursues, and it is easy to imagine resistance to concerns about asset price levels," he said in the Rotary talk.

"Nevertheless, as the anti-inflation experience of 1979-82 illustrates, it is possible to build considerable support, or at least tolerance, for policies that some considered risky and unappealing."

On home foreclosures, Stern told Tech students there should be assistance to homeowners when there is "reasonable" cause to do so. However, he said, there should be caution in handling "eyes-wide-open contracts." He gave the example of a lender five years from now considering a home loan to a low-income buyer.

"It could well be, 'I'm not going to get involved because a court's going to impose a loss on me,'" he said.

Stern also praised Treasury Secretary Henry Paulson for his experience with financial markets.

"He seems to be a man of action, and in these circumstances, I think that's important," he said.

Garrett Neese can be reached at gneese@mininggazette.com.