Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson Tuesday implored members of the Senate Banking Committee to quickly enact legislation that would permit the government to buy up bad housing-related loans that have negatively impacted credit markets. VOA's Barry Wood has more.
Bernanke said quick action is required to stabilize financial markets and combat the threat of economic slowdown. He said markets wildly gyrated last week and dire consequences loomed as the government scrambled to come up with a plan to shore up bad housing related loans.
Treasury Secretary Paulson told skeptical lawmakers that the two-year long slump in the U.S. housing market is the cause of the crisis.
"The root cause is the housing correction [price declines], as you have all pointed out, that has resulted in illiquid mortgage assets choking off the flow of credit, which is so vitally important to our economy," said Paulson.
Bernanke defended recent actions by the government to deal with the problem. Those measures since September 7, included taking over the two government sponsored entities most involved in home finance, allowing the Lehman Brothers investment bank to fail, taking over AIG - the world's biggest insurer, and then announcing Friday a $700-billion rescue plan that must be approved by Congress.
Bernanke denied that the government has been too generous to the shareholders and managers of failing institutions.
"We have insisted on bringing the shareholder value down close to zero, imposing tough terms and so on. But the firms we are dealing with now [with the proposed legislation] are not necessarily failing," he said. "They are contracting, de-leveraging and pulling back. And they will be unwilling to make credit available as long as market conditions are as they are now."
Lawmakers were insistent that bankers not be rescued at the expense of ordinary homeowners and consumers. Both Bernanke and Paulson agreed, but said without a comprehensive bailout all consumers will suffer.
Paulson, who was a top executive of the Goldman Sachs investment bank before coming to Washington, blamed weak regulation for the abuses in mortgage finance.
"I was shocked, absolutely shocked [when I arrived in DC two years ago], to find that it was not deregulation or too much regulation or too little regulation, it was just a flawed regulatory structure built for a different model," said Paulson.
In 1999 Congress gave increased freedoms to the financial service industry, but failed to create a comprehensive regulatory structure.
President Bush, speaking at the United Nations in New York, said he is acting decisively to contain the financial crisis. The administration wants Congress to approve the rescue legislation before its scheduled adjournment on Friday, but there is no clear indication that that timetable will hold.