Recession likely without help, US central banker claims

Bernanke sketched a scenario in which neither businesses nor consumers could borrow money.

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September 24, 2008 12:31
3 minute read.
Recession likely without help, US central banker claims

Paulson and Bernanke 88 224. (photo credit: )

 
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Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday the United States risks a recession with higher unemployment and increased home foreclosures should they fail to pass the Bush administration's $700 billion plan to bail out the financial industry. Bernanke sketched a scenario in which neither businesses nor consumers could borrow money as President George W. Bush and top lawmakers leaders in both parties voiced hope for agreement within days on a plan to ease the crisis. "Nobody is happy" about the bailout request, said Rep. Steny Hoyer, leader of the House of Representatives' Democratic majority. Still, he spoke of possible passage of legislation by the weekend. "Nobody wants to have to do this," agreed Rep. John Boehner, the Republican leader. He said he was hopeful of a quick agreement, despite withering criticism from conservatives in his party, some of whom likened the plan to socialism. With the stock market headed lower in early afternoon, the stakes were unmistakable. Treasury Secretary Henry Paulson said Congress must pass the legislation this week. "I understand speed is important, but I'm far more interested in whether or not we get this right," said Democratic Sen. Chris Dodd, presiding over a hearing by the Senate Banking Committee panel where Bernanke joined Paulson in appealing for quick legislation. "There is no second act to this," Dodd said. "There is no alternative idea out there with resources available if this does not work." Bernanke's remarks about the risk of recession came in response to a question from Dodd, 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. Across the Capitol complex, Vice President Dick Cheney and Jim Nussle, the administration's budget director, met privately with restive House Republicans, some of whom emerged from the session unpersuaded. 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. 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. 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. So far this year, a dozen federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering. The US has taken extraordinary measures in recent weeks to prevent a financial calamity, which would have devastating implications for the broader economy. It has, among other things, taken control of mortgage giants Fannie Mae and Freddie Mac, provided an $85b. emergency loan to insurance colossus American International Group Inc. and temporarily banned short selling of hundreds of financial stocks.

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