Congress needs to act swiftly to address the financial market turmoil and not drag the process of passing legislation with unnecessary provisions, Fed Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson told lawmakers on Tuesday in prepared remarks.
"As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation," said Bernanke in his opening statement. "Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse."
Treasury Secretary Paulson, whose opening remarks carried along the same theme as Bernanke's said, "Over these past days, it has become clear that there is bipartisan consensus for an urgent legislative solution. We need to build upon this spirit to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don't have broad support."
The Fed Chairman and Treasury Secretary went on to remind listeners that the Fed typically prefers to let financial institutions resolve their own financial difficulties
, but that in the case of Fannie Mae, Freddie Mac and AiG, non-intervention would have resulted in larger problems.
"In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company," said Bernanke. "To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms."
Bernanke also pointed out that in the case of Lehman Brothers, it was deemed unnecessary to intervene given the repercussions in the financial marketplace.
The Fed Chairman also said that he supported the U.S. Treasury's proposals to purchase illiquid assets from financial corporations on the basis that it would add a fresh new wave of capital and confidence to the financial system. He also told lawmakers that he is in close contact with central banks across the globe to provide additional U.S. dollar liquidity through open market operations.
"This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy," added Paulson.
At 9:30 a.m. EDT, Fed Chairman Ben Bernanke will testify before the Senate Banking Committee along with FHFA Director James Lockhart and SEC Chairman Christopher Cox. The policy-makers will be joined by U.S. Treasury Secretary Henry Paulson at 10 a.m. EDT.
By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2008