Bernanke: Government Needs More Power To Insulate Economy

WASHINGTON — The nation's top economic officials urged Congress on Thursday to give them new regulatory tools to better protect the country from economic and financial havoc if a major Wall Street firm were to fail.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson made the recommendations in a joint appearance before the House Financial Services Committee as fresh worries gripped investors about the financial shape of mortgage giants Fannie Mae and Freddie Mac as well as investment bank Lehman Brothers Holdings Inc.

Both Bernanke and Paulson endorsed creating new procedures by which the government can guide an orderly liquidation of a failing investment bank in an effort to minimize any fallout that might be inflicted on the broader financial system and the overall economy. Such procedures, which are in place for commercial banks, might have made the dissolution of investment firm Bear Stearns more orderly.

Although Bernanke defended the Fed's controversial decision to financially back JP Morgan Chase's takeover of the Bear Stearns, the Fed chief said, "This is not something I want to do again" were other investment firms to falter.

Given a crush of other business, Congress is unlikely to give financial regulators new powers this year. It will be for the next president and the next Congress to grapple with.

The committee's chairman, Rep. Barney Frank, D-Mass., suggested it was more important for Congress to "do it right" rather than act quickly on substantial legislative changes. Bernanke and Paulson agreed with that assessment. "Realistically it is going to be difficult to get things done this year," Paulson acknowledged.

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Still, new powers could help insulate the financial system _ U.S. taxpayers _ from getting walloped if a big financial company were to collapse, Bernanke and Paulson said.

"In light of the Bear Stearns episode, Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said.

Paulson, who recently laid out such a proposal, said: "It is clear that some institutions, if they fail, can have a systemic impact." However, financial players need to be disciplined in managing risk and not expect the government to fly to their rescue, he added. "For market discipline to effectively constrain risk, financial institutions must be allowed to fail," he said.

The recommendations were part of a broader debate about the best ways to revamp the country's antiquated regulatory system. The idea is to brace the system to better respond to modern-day crises like the housing and credit debacles that have badly bruised the economy.

The Treasury chief also sought Thursday to calm investor jitters about the financial health of mortgage giants Fannie Mae and Freddie Mac. They are "working through this challenging period," Paulson told Congress. "Their regulator has made clear that they are adequately capitalized."

Shares of Fannie and Freddie tumbled Thursday amid widespread fears on Wall Street that shareholders will be wiped out if the government is forced to rescue the two companies.

Asked whether such companies could pose a risk to the U.S. financial system, Paulson replied: "In today's world, it is not helpful to speculate about any financial institution and systemic risk."

Meanwhile, Lehman Brothers, the nation's fourth-largest investment bank, is seen by many analysts to be the weakest of Wall Street's biggest firms. The company's shares plunged Thursday morning. Concerns emerged about Lehman's liquidity and leverage last month after the investment bank reported an unexpected $3 billion loss for the second quarter.

Of the broader financial system, Paulson said: "Right now we're going through a period of unusual turmoil" and the government's focus needs to be on stabilizing the situation. Bernanke echoed that sentiment.

On the weakened value of the U.S. dollar, which has boosted exports but contributed to high oil prices, Paulson said: "We want a strong dollar. A strong dollar is in our nation's interest. ... We're going through a tough period right now."

Bernanke has called for stronger oversight of big Wall Street firms, which are regulated by the Securities and Exchange Commission. Those firms have been given unprecedented _ albeit temporary _ access to tap the Fed for emergency loans, a privilege that has been granted for years to commercial banks, which are more tightly regulated.

With credit problems persisting, the Fed may extend the lending privilege to investment banks into next year, Bernanke has said.

The Fed's financial backing of JPMorgan Chase's takeover of the troubled Bear Stearns has drawn criticism from Democrats, who call it a government bailout that could put billions of taxpayer dollars at risk. Both Democrats and Republicans lawmakers said changes need to be made to protect taxpayers in the future should another big firm get into trouble.

Rep. Spencer Bachus, R-Ala., said a "shock absorber" is needed to make sure that "taxpayers are not holding the bag. ... This is a tall order."

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On the Net:

House Financial Services Committee: http://financialservices.house.gov

Comments

[Rule Of Law]

Since he's not a part of the "Government," being only the head of a private consortium of banks known as the FED, then what the F is he going on about?

[IowaKid]

But, but , but isn't adding regulations unrepublican?

[elpollo]

What Paulson and Bernanke wish to do is to isolate their masters from the consequences of their own greed and stupidity. There is only one way to attempt to do this - move their losses to the US taxpayer. The losses from Fannae and Freddie when (not if) moved to the national debt may double it and result in the (full faith and credit of the ) US Treasury losing its AAA rating. The Dollar is dropping big time since they let out this "secret" yesterday. Of course, Paulson and Bednanke knew about the insolvency of these GSE's for months and responded to it by changing regulations ( jumbos and reserve requirements) so that the banks could move as much of their Toxic Waste to the GSE's "portfolios" before the s**t hit the proverbial fan, which now allows them to move the Toxic Waste to the taxpayers. These creeps should be indicted under the RICO statues along with most of Congress and the Supreme court. This will increase the price of borrowing which the US Treasury pays banks to invent money from their hats, instead of inventing it themselves (see the video from google.video.ca Money As Debt if you find this statement confusing). Of course the average American would have to change the channel from American Idol to figure this out. I recommend that one invests in Vasoline as the body politic of the US is going to need a whole lot of it to ease the pain.

[Chavez08]

A full market collapse would be the best thing for this country. We can then start fresh with a system that actually works.

[Chavez08]

What's that? The Capitalists want to invoke Socialism to protect themselves against their own devices?

Any Capitalists out there still think this system works?????

[MemphisBuffalo]

So he is proposing market regulation like oh lets see... socialist and dare I say communits.

[SCG]

Yes by all means we must insulate economy, from the economy.

[SisterAnn]

Maybe the Fed want to take ownership of everything. The Bush and Cheney gang and the Fed bankers and paulson are control freaks. If they could take control of every brokerage, that would be bad news for all of us.

Sometimes I think about 50 people are determined to own every asset in this country and others.

[leftLibertarian]

Sorry Ben, I'm with Tom Paine on this....

The best government is no government.

Get a real job you Bum!

[chronic]

These right wingers are useless.

Only a fool would vote them into any government position.

[VivaZapata]

try a house (of representatives) of fools. why not they vote for the FISA bill.

[Rule Of Law]

What...15 Patriots out of a possible 100?

[VivaZapata]

socialism only works for the rich these days.

[loki]

I think there is a misunderstanding with the definition of "Economy" When the Feds or our Government talks about the "Economy" they are referring to corporations and ultra wealthy elitist. When they want to fix or help the "Economy" they are talking about these groups.

When the rest of us talk about the "Economy" we talk about the world we live in, where energy, food, clothes, everything we need to live and survive is rising in cost. We do not consider someone having to keep last years Bentley because this years is more than he would like to spend , as a problem with the "Economy"

[AbolishTheFed]

In speeches delivered Tuesday, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson outlined the ruthless class policy being carried out to place the burden for the financial and housing crisis on the backs of working people.

Bernanke indicated that the Fed would extend its policy of offering unlimited loans to major Wall Street investment banks. The provision of Fed funds to non-commercial banks and brokerage firms, a departure from the Fed"s legal mandate without precedent since the Great Depression, is part of a policy of bailing out the banking system to the tune of hundreds of billions of dollars. The Fed announced its loan program for investment banks last March when it dispensed $29 billion to JPMorgan Chase as part of a rescue operation to prevent the collapse of Bear Stearns.

In his speech, Treasury Secretary Paulson acknowledged that home foreclosures in 2007 reached 1.5 million and predicted another 2.5 million homes would be foreclosed in 2008. But he made clear that nothing would be done to save the vast majority of distressed homeowners from being thrown onto the street.

[SCG]

..... a magic wand?

Maybe they can pass a law that everyone must shop? We can use monopoly money as legal tender.

[libertyreturns]

The last thing the Federal Government needs is more power.
What it needs is to be neutered!