Federal Reserve Chairman Ben Bernanke on Monday blamed banks for slowing the recovery and keeping unemployment high.

Despite hundreds of billions in dollars in taxpayer bailouts, the nation's banks have dramatically reduced their lending this year.

"Banks' reluctance to lend will limit the ability of some businesses to expand and hire," Bernanke said. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."

Bernanke predicted that the unemployment rate will get worse before it gets better. "The best thing we can say about the labor market right now is that it may be getting worse more slowly," Bernanke told several hundred people in suits crowded into a midtown Manhattan hotel ballroom.

"Access to credit remains strained for borrowers who are particularly dependent on banks," Bernanke said. "Bank lending has contracted sharply this year...[and] banks continue to tighten the terms on which they extend credit for most kinds of loans."

Bernanke also touched on "too big to fail." While some, like Rep. Paul Kanjorski (D-Penn.) and Bank of England Governor Mervyn King, have said that big banks should be broken up, Bernanke said in response to a question, that "making banks smaller isn't going to do it."

Former Fed chairman Paul Volcker and former Citigroup chairman and co-CEO John Reed, among others, have advocated for some sort of restoration of the Glass-Steagall act -- the Depression-era law that kept commercial banks and investment banks separate. That, too, would result in the breakup of the biggest banks. But Bernanke said that such a move "would not be constructive."

The assortment of Wall Street bankers and titans who make up the Economic Club of New York listened to Bernanke deliver his speech as they dined on herb-roasted grilled chicken breast in a mushroom cabernet reduction with goat cheese and mesclun greens.