Bernanke: Recession certain in absence of bailout

By JULIE HIRSCHFELD DAVIS and JEANNINE AVERSA

Associated Press

September 24, 2008

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday it risks a recession, with higher unemployment and increased home foreclosures, if lawmakers fail to pass the Bush administration's $700 billion plan to bail out the financial industry.

Bernanke told the Senate Banking Committee that inaction could leave ordinary businesses unable to borrow the money they need to expand and hire additional employees, while consumers could find themselves unable to finance big-ticket purchases such as cars and homes.

Bernanke's remarks came in response to a question from Sen. Chris Dodd, D-Conn., the committee's chairman, who seemed eager to hear a strong rationale for lawmakers to act swiftly on the administration's unprecedented request.

"The financial markets are in quite fragile condition and I think absent a plan they will get worse," Bernanke said.

Ominously, he added, "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."

GDP is a measure of growth, and a decline correlates with a recession.

Bernanke outlined his grim scenario as committee members sat in silence, and as the Bush administration pressed lawmakers publicly and privately to act speedily.

Vice President Dick Cheney and Jim Nussle, the Bush administration's budget director, met privately with restive House Republicans, some of whom emerged from the session unpersuaded.

"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.

Added Rep. Darrell Issa, R-Calif., "I am emphatically against it."

Dodd and other key Democrats have been in private negotiations with the administration since the weekend on legislation designed to allow the government to buy bad debts held by banks and other financial institutions.

Despite expressions of unhappiness in both parties, the prospects for legislation seemed strong, with lawmakers eager to adjourn this week or next for the elections.

Differences remained, though, including a demand from many Democrats and some Republicans to strip executives at failing financial firms of lucrative "golden parachutes" on their way out the door.

The administration balked at another key Democratic demand: allowing judges to rewrite bankrupt homeowners' mortgages so they could avoid foreclosure.

Despite the unresolved issues, President Bush predicted the Democratic-controlled Congress would soon pass a "a robust plan to deal with serious problems." He was speaking to the United Nations General assembly.

Stocks held steady in pre-noon trading on Wall Street as Treasury Secretary Henry Paulson told the Senate Banking Committee that quick passage of the administration's plan is "the single most effective thing we can do to help homeowners, the American people and stimulate our economy."

But even before Paulson could speak, lawmakers expressed unhappiness, criticism of the plan and -- in the case of some conservative Republicans -- outright opposition.

"I understand speed is important, but I'm far more interested in whether or not we get this right," said Dodd, who spoke first. "There is no second act to this. There is no alternative idea out there with resources available if this does not work," he added.

Sen. Richard C. Shelby of Alabama, the panel's senior Republican, was even more blunt. "I have long opposed government bailouts for individuals and corporate America alike," he said. Seated a few feet away from Paulson and Ben Bernanke, the chairman of the Federal reserve, he added, "We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis."

The legislation that the administration is promoting would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions. Getting those debts off their books should bolster their balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the sputtering economy.

Buttressing Paulson's comments, Bernanke said action by lawmakers "is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

A third witness, Securities and Exchange Commission Chairman Christopher Cox, urged Congress to regulate a type of corporate debt insurance that figured prominently in the country's financial crisis.

"I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets," he said. The debt insurance is known as credit default swaps.

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