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Bernanke: Credit crunch still a worry
Question of the Day
The fight over how to use the Treasury’s $700 billion bank rescue fund went into another round on Capitol Hill Tuesday, with top administration officials testifying that the money should be reserved for potential financial disasters — including another possible big bank failure — rather than auto or homeowner bailouts.
Federal Reserve chairman Ben S. Bernanke stressed that while the severe crunch in credit markets has eased somewhat since last month, markets remain “far from normal” and getting loans is still a problem for banks, businesses and consumers. Further turmoil in markets and the downfall of more big institutions are still possible, he said.
Secretary of the Treasury Henry Paulson told the House Financial Services Committee that the best way to limit the spread of an already deep recession in the economy is by using the funds to further bolster banks and credit companies that are being hammered not only by worsening mortgage defaults but by sharply rising delinquencies on credit cards and other kinds of consumer debts.
“The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties,” he said, as committee members lambasted him for not directing some of the funds to help homeowners facing foreclosure or automakers facing bankruptcy.
“If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract,” Mr. Paulson said. “So early last week, we concluded it was only prudent to reserve our […] capacity, maintaining not only our flexibility, but that of the next administration.”
Another reason for conserving the funds, he said, is “this year we will issue $1.5 trillion of Treasury securities” to finance the bank rescue programs — a level of debt many times higher than the government has ever footed before.
While lawmakers conceded that Mr. Paulson is under no obligation to use the funds to rescue Detroit’s Big Three auto firms, House committee chairman Barney Frank, Massachusetts Democrat, charged that he is failing to carry out the law by refusing to divert money into foreclosure prevention as Congress directed.
“There, I believe, is an overwhelming and powerful set of reasons why some of the…money must be used for mortgage foreclosure,” he said, advising Mr. Paulson to “let a hundred flowers bloom” by experimenting with ways to help homeowners avoid losing their houses.
Legislators praised Federal Deposit Insurance Corp. chairman Sheila Bair, who testified that it is “essential” for Treasury to offer loan guarantees and credit help to slow home foreclosures. She said the Treasury is getting “behind the curve” by not taking more aggressive action.
Mr. Paulson said the Treasury already is providing the most powerful support it can for homeowners by providing backing for Fannie Mae and Freddie Mac to ensure they can keep guaranteeing mortgages with low interest rates.
“I have not said no” to funding a foreclosure prevention effort, he said, but he has not found a program that “strikes the right balance” between helping homeowners and protecting taxpayers’ money. “I am looking very hard” for such a program, he said.
Mr. Bernanke fended off criticism of the Fed for not disclosing more about the more than $2 trillion of loan programs for banks and corporations it started this year, which lawmakers said could expose taxpayers to large losses.
It would be “counterproductive” to reveal identities of financial institutions borrowing from the Fed because “that might create a stigma,” he said. “It’s very safe. We’ve never lost a penny in these lending programs.”
Mr. Bernanke conceded that the massive loan programs, along with the Treasury’s $290 billion of cash infusions for banks and insurance companies, so far have had a limited impact, producing only gradual improvements in recent weeks. The biggest breakthrough is top-rated corporations, states and cities are able to borrow once again in open markets, he said.
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