World Markets Fall as Investors Weigh Relentless Trouble Part 2 “Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,” he said. Strikingly, Mr. Bernanke expressed concern about how huge amounts of capital are increasingly concentrated in a handful of enormous financial institutions. “The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem,” Mr. Bernanke said. “And that problem, we’ve just recognized now in the current situation, how severe it is.” It seemed a curious concern for a man whose central bank has worked with the Treasury to engineer a series of shotgun corporate weddings, such as Bank of America’s purchase of Merrill Lynch and JPMorgan Chase’s acquisition of Bear Stearns — deals that have further concentrated money in fewer hands. Mr. Bernanke’s prognosis and the latest carnage on Wall Street lent urgency to the debate over what the government should do now to soften the blow to the economy. In Washington, and on the campaign trail, conversation centers on putting together a second round of so-called government stimulus spending, following the $152 billion unleashed this year via tax rebates to households and tax cuts for businesses. Democrats in the House are drafting a roughly $150 billion package of spending measures aimed at spurring the economy, according to senior aides, including aid for states, large-scale construction projects to generate jobs and the expansion of unemployment benefits. Senator Barack Obama of Illinois, the Democratic presidential nominee, is urging $175 billion worth of relief measures. The Republican nominee, Senator John McCain of Arizona, has declined to outline his own proposal, though his senior economic adviser, Douglas Holtz-Eakin, said he is “open to any measure that genuinely stimulates the economy.” Republicans on Capitol Hill have emphasized tax cuts for businesses in any stimulus package, a stance that puts them at odds with Democrats, though recent signs suggest greater potential for a compromise. “We need fiscal stimulus,” said Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “The outlook is much darker than it was even a few months ago.” The checks the government sent to households last summer appear to have kept the economy growing, but economists are skeptical such a course could work again. "The spend rate will be really low because people are scared to death," Mr. Baker said. When economists met with House leaders on Monday to suggest a course, the favored means appeared to be aiding state and local governments, whose property tax revenues are diminishing as home values fall. Local governments are a crucial source of employment and social services relied upon by the poor. “The states are taking steps right now that are deepening the recession, through no fault of their own,” said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. “They’re forced to either raise taxes or cut services. Neither of those are where we need to be right now.” The crisis on Wall Street has sown fears that banks would hold tight to their dollars and starve the economy of capital, preventing businesses from securing finances to hire people and expand. If the bailout succeeds in restoring confidence, that should eventually get money flowing and lift economic activity. But regardless of Wall Street’s travails, a broader set of difficulties has been taking money out of the economy, putting the squeeze on American households and businesses. The economy has lost 760,000 jobs since the beginning of the year, and millions of workers have seen their hours cut, shrinking paychecks just as plunging real estate prices prevent households from borrowing against the value of their homes. In short, American spending power is declining, and this has become a downward spiral: As wages shrink, workers spend less, and that limits demand for workers at the businesses that once captured their dollars. Many economists now assume that unemployment, currently at 6.1 percent, will climb to 9 percent by the end of next year. Some now envision it could reach 10 percent — a level not seen in 25 years. "At this point, the thing has probably just got to play out," said Martin N. Baily, a chairman of the Council of Economic Advisers under President Bill Clinton and now a fellow at the Brookings Institution. "I don’t know that there’s anything that we can do to avoid a mild recession. The question is what can we do to avoid a very severe recession."