WASHINGTON — The Federal Reserve Chairman, Ben S. Bernanke, told lawmakers on Tuesday that the country could be in for “a prolonged episode of economic stagnation” if they do not act quickly on President Obama’s budget, but he quickly encountered deep anger, particularly over the dealings of the ailing American International Group.
Mr. Bernanke told the Senate Budget Committee that the worst outlook, should action on the president’s budget be delayed, would be “further deterioration in the fiscal situation” and probably “lower output, employment and incomes for an extended period.”
But the chairman was met at once with sharp questions from the senators, some of whom said they were passing on the resentment they have been hearing from their constituents, not necessarily about President Obama’s proposed $3.55 trillion budget for the next fiscal year but about the rescue plan for the financial system and the economic stimulus package.
“Mr. Chairman,” Senator Ron Wyden, Democrat of Oregon, asked at the outset, “at what point will the taxpayer no longer be on the hook for the massive A.I.G. failure? What is the end game for American taxpayers?”
Mr. Bernanke replied that nothing had made him more angry during the months of the sprawling financial crisis than the episode involving the insurance giant that has been reporting astronomical losses and has been given financial lifelines worth billions of dollars from the taxpayers.
“A.I.G. exploited a huge gap in the regulatory system,” Mr. Bernanke said. “There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company.” And this quasi-hedge fund, Mr. Bernanke went on, to nobody’s surprise, made irresponsible bets and took huge losses.
“We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system,” Mr. Bernanke said.
While not necessarily disagreeing with Mr. Bernanke, several senators seemed almost to be seething when they talked about A.I.G. Senator Patty Murray, Democrat of Washington, pressed Mr. Bernanke on whether A.I.G.’s fate is really linked to the welfare of “just average everyday families.”
Definitely, Mr. Bernanke said, talking about the “potential for contagion.”
“In this case, we’re dealing with the largest insurance company in the world,” Mr. Bernanke said. “Its failure would have sent shockwaves through the entire insurance industry” and likely beyond, he said.
But some senators said it did not seem right that A.I.G., whose recklessness was on a grand scale, was apparently deemed too big to fail — unlike the owners of many small businesses whose troubles apparently do not resonate in Washington.
Mr. Bernanke agreed that it is high time that stricter regulations be put in place to prevent future A.I.G.-type debacles. But for now, he said, helping the company is the best option, not just for its humbled executives but for the average taxpayer.
Mr. Bernanke’s testimony came as Congress began on Tuesday the monthslong process of considering President Obama’s spending plan, which envisions a deficit of $1.8 trillion this year and trillion-dollar deficits only slowly coming under control.
While the Fed would normally look askance at numbers like that, the testimony on Tuesday seemed intended to give a green light, as part of a no-holds-barred economic recovery program.
Mr. Bernanke said the consequence might well be an increase in public debt to the equivalent of 60 percent of economic output, compared with 40 percent before the economic crisis began — and reminiscent of the levels after the gigantic borrowing of World War II.
Also on Tuesday, the chairwoman of the White House Council of Economic Advisers, Christina Romer, said the first quarter economic performance was shaping up to be “pretty lousy.” She spoke to the National Association for Business Economics.
The administration is sending forth several of its top economic emissaries, including Treasury Secretary Timothy F. Geithner and Peter Orszag, the White House economic adviser, to begin making the case for the Congress to move expeditiously on the $3.55 trillion budget plan President Obama unveiled last week.
At the same time, the Fed officially kicked off a new program to make consumer loans more easily available. That infusion of $200 billion, to support lending of up to $1 trillion, was announced in January, was supposed to begin in February, and is occurring this month.
“Our economy and financial markets face extraordinary challenges,” Mr. Bernanke told the committee, “and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end.”
At a time when badly shaken public confidence has slowed consumer spending and walloped the stock markets, Mr. Bernanke offered little in the way of near-term hope. Rather, he said that barring determined Congressional action — and a degree of luck — things might easily get worse.
“The recent near-term indicators show little sign of improvement,” he said, pointing to the loss of 600,000 jobs in January, a sharp drop in manufacturing output and a steep decline in exports.
The $787 billion economic stimulus package recently signed into law should increase demand and production over the coming two years, Mr. Bernanke said, before adding that “the timing and the magnitude of the macroeconomic effects of the fiscal program are subject to considerable uncertainty.”
Even as the stimulus plan seeks to lay the groundwork for self-sustaining recovery, he said, this would depend heavily on a return to financial stability. And on that front, he said, “more needs to be done.”
But the billions spent on financial stabilization, the increased spending and reduced taxes from the stimulus package, and the broader effects of the weak economy would “widen the federal budget deficit substantially this year,” Mr. Bernanke said.
Meanwhile, President Obama sought to rally the markets but said the nation’s economic outlook would probably not improve until frozen lines of credit began flowing again to the nation’s businesses and consumers.
“The economy’s performance in the last quarter of 2008 was the worst in over 25 years,” Mr. Obama said. “And frankly, the first quarter of this year holds out little promise for better returns.”
Mr. Obama announced a long-awaited Federal Reserve program intended to increase the availability of credit to small businesses and consumers. The initiative will generate up to $1 trillion in lending, which the president said would “jumpstart the credit markets and get private lending going again.”
Funds from the program, formally the Term Asset-Backed Securities Loan Facility, or TALF, will be disbursed beginning on March 25.
The TALF, meant to restore lending to auto buyers and businesses, will accept as collateral securities backed by “rental, commercial, and government vehicle fleet leases, and ABS backed by small-ticket equipment, heavy equipment, and agricultural equipment loans and leases,” the Fed said Tuesday.
The program calls for the Federal Reserve to buy securities that are secured by different types of debt, from credit cards to automobile and student loans. It is set to run through December, but officials said it could be extended.
In an appearance at the Department of Transportation on Tuesday, Mr. Obama said that the first jobs to be created in his $787 economic stimulus bill were set to begin in a few weeks. He said the road-building program would create or save 150,000 jobs by the end of next year.
“That’s more jobs being created or saved in one year than G.M., Ford and Chrysler have lost in manufacturing over the past three years combined,” Mr. Obama said. “And the jobs that we’re creating are good jobs, that pay more than average -- jobs grinding asphalt and paving roads, filling potholes, making street signs, repairing stop lights, replacing guard rails.”
The White House has scheduled several events this week to highlight the administration’s economic plans, with the president still forcefully arguing the merits of the economic stimulus plan that he signed into law last month. It is an effort, aides said, to keep the message fixed on economic recovery, rather than placing the entire focus on the costly domestic agenda that he has proposed.
“From Wall Street to Main Street to kitchen tables all across America, our economic challenge is clear,” Mr. Obama said. “And now it is up to us to meet it.”
Jeff Zeleny contributed reporting
Posts
No comments:
Post a Comment