Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson, testified today before the Senate Banking Committee on turmoil in U.S. credit markets.
Once again in their prepared remarks they stressed the need for Congress to take immediate actions on a Treasury Department program to buy illiquid mortgage-linked securities, and avoid severe spillover effects on the economy.
Mr. Paulson said that a quick enacting of the proposed program was necessary to stabilize the financial system. He also noted that while the Federal Reserve and Treasury’s involvement in addressing problems at GSEs, or working with market participants to prepare for the failure of Lehman Brothers (LEH), may have been necessary ; these actions, based on the latest market developments – have proven to be insufficient, further emphasizing the fact, said Paulson, that more is needed and that “we must move beyond a case-by-case approach” to calm market turmoil. He urged lawmakers to take decisive action to comprehensively address the housing correction, which he believes is the root cause of this turmoil, and more importantly, not to slow the bailout plan with unrelated provisions.
Mr. Paulson reiterated the fact that removing troubled assets from markets will boost stability and allow for a flow of credit which is so vitally important to the proper functioning of the economy and its expansion. Paulson also added that the plan is not an expenditure, rather American taxpayers are receiving an asset that will be eventually sold.
Mr. Bernanke in his remarks, before sometime a skeptical Senate panel, said that the downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy.
The Fed Chair told the Committee that ongoing liquidity pressures remain persistent and urgent action from Congress is required to stabilize the situation. If we don’t act now, he said, there may be “very serious consequences for our financial markets and for our economy.”
Mr. Bernanke noted that if the plan is not put into effect unemployment will rise and further drag down the market. The Fed supports the Treasury’s proposal to buy up to $700 billion in illiquid assets from financial firms.
The Fed chair also pointed out the importance of addressing the shortcomings and weaknesses of our regulatory system. However, at this juncture, he told lawmakers – “in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand”.
Lawmakers have expressed their determination to move without delay on the Treasury’s proposed plan. White House spokesman Tony Fratto, asked what would happen if the bailout plan cannot be put in place this week, replied: “You should think of that as unthinkable.” [Reuters]