WASHINGTON -- Congress must act now to stabilize financial markets and ward off a steeper financial downturn, key federal officials told lawmakers Tuesday as the Bush administration pressed for passage of its financial bailout plan.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson and Securities are testifying Tuesday on Capitol Hill. They are facing lawmakers who are openly skeptical of Treasury's plan to have the government buy up to $700 billion in distressed mortgage-backed bonds and other assets from financial firms.
The plan is designed to create liquidity in markets and help stabilize prices, while reducing investor uncertainty. The White House wants congressional approval within days, but skepticism from lawmakers was clear Tuesday.
"At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand," Bernanke told a Senate Banking Committee panel. "I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way."
But before he could speak, Sen. Richard Shelby of Alabama, the panel's senior Republican, spoke bluntly. "I have long opposed government bailouts for individuals and corporate America alike," he said, seated a few feet away from Paulson and Bernanke.
"We have been given no credible assurances that this plan will work. We could very well spend $700 billion, or a trillion, and not resolve the crisis," he said.
Sen. Jim Bunning, R-Ky., added, "This massive bailout is not a solution. It is financial socialism and it's un-American."
There were skeptics in the House as well. "Just because God created the world in seven days doesn't mean we have to pass this bill in seven days," said Rep. Joe Barton, R-Texas.
Bernanke said the U.S. economy faces "substantial challenges," including the weak labor market and elevated inflation, in addition to financial market turmoil. "If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse," Bernanke said.
"The financial markets are in quite fragile condition and I think absent a plan they will get worse," he said.
The Fed chairman acknowledged "shortcomings and weaknesses" of U.S. financial markets and the government's regulatory system. But he said a broad regulatory overhaul — while important — must wait until after Congress acts on the Bush administration plan.
Bernanke and Paulson have been pushing Congress to vote on a plan by the end of this week. Their testimony Tuesday comes as at a crucial time. Democratic and Republican congressional leaders have vowed to work to pass a plan that would enable the government to buy up distressed securities. But leaders in Congress face a growing backlash from rank-and-file lawmakers, whose constituents are outraged that the government is about to engineer the most dramatic bailout since the Great Depression.
Those lawmakers say they cannot ask average taxpayers to rescue Wall Street without a series of changes in the Paulson plan — such as limiting executive bonuses and other pay in firms that get government help, ensuring that homeowners with bad mortgages get more help, allowing bankruptcy judges to write down mortgages in bankruptcy and adding protections for taxpayers in the plan — such as giving the government an equity position in troubled firms.
Treasury and Democrats have worked to resolve differences in areas such as home ownership assistance and greater oversight, but other issues remain unresolved.
Nevertheless, President Bush said Tuesday he is confident that Congress will reconcile differences and come together to pass a bailout bill.
White House spokesman Tony Fratto said any hint of a delay could lead to further financial market chaos, which would trickle through the economy.
"Our financial markets do not need uncertainty right now, they need increased certainty," he said in a conference call with reporters. "We are very, very confident that it will get done this week."
Bernanke and Paulson's appearances on the Hill was part of a full-court press on the rescue plan Tuesday. Vice President Dick Cheney, White House chief of staff Josh Bolton and Keith Hennessey, director of Bush's National Economic Council, met with Republican lawmakers in the morning.
In his testimony, Bernanke said the housing market crash has been a key factor in both the economic slowdown and financial market turmoil. "Falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital," Bernanke said.
He emphasized that he would prefer private market solutions — saying federal aid should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk.
He noted that stressed financial firms have raised capital as they take losses from their impaired assets. But it hasn't been enough.
Bernanke also gave his first public explanation of the dramatic series of Fed and Treasury actions earlier this month, when he and Paulson refused to rescue investment bank Lehman Bros. — only to find themselves forced just days later to offer a $85 billion Fed loan to prop up insurance giant American International Group. Bernanke noted that federal officials tried to line up private buyers for Lehman, which later declared bankruptcy, and AIG.
Given the size and composition of AIG's obligations, a "disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy," Bernanke said. He emphasized that the Fed imposed "significant costs and constraints" on AIG officials and creditors as a condition for the Fed loan, with the loan carrying an interest rate of more than 11% and the government getting a nearly 80% equity interest
Bernanke said that while the failure of Lehman posed risks, the Fed and Treasury felt investors and firms doing business with Lehman had time to prepare for the firm's demise.
But the combination of the Lehman and AIG turmoil led to huge market turmoil, including a flight from money market funds and a buying spree for Treasury bonds. "By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth," Bernanke said.
The Fed took a number of actions to increase liquidity and stabilize markets, in concert with other central banks. But the moves have not been enough, and Bernanke told Congress in the testimony that lawmakers must now act.
Paulson in his prepared remarks also implored Congress to move quickly to shore up the financial system to "avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy."
The Treasury secretary said the roots of the current crisis reach back years, starting with shoddy lending standards and borrowers who took on mortgages they couldn't afford. The bad loans have created a chain reaction that has made it hard for Main Street to finance normal operations — and could "threaten all parts of our economy" if it persists.
Paulson said there is bipartisan agreement on the need for urgent action, and asked Congress to enact his proposal "quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don't have broad support." He said the Treasury plan on its own is the "single most effective" way to help taxpayers and the economy.
The Treasury secretary said the best way to protect taxpayers is to clean troubled assets off businesses' books, saying his $700 billion approach would cost far less that the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.
Like Bernanke, Paulson said Congress and the next President must update the nation's financial regulatory framework as soon as the curent crisis is past.