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Bernanke Offers Sobering Take on Economy

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Bernanke Offers Sobering Take on Economy

Economy

Bernanke Offers Sobering Take on Economy

Bernanke Offers Sobering Take on Economy

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Federal Reserve Chairman Ben Bernanke has given a grim assessment of the challenges facing the economy. He told lawmakers the country faced difficulties, including the housing crisis, higher energy and fuel costs, and a short-term rise in inflation.

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MICHELE NORRIS, host:

And I'm Michele Norris.

Tough scrutiny on Capitol Hill today for the Bush administration's plan to prop-up Fannie Mae and Freddie Mac. Members of the Senate Banking Committee peppered the Treasury secretary and the Federal Reserve chairman about how much risk the plan entails for taxpayers.

NPR's John Ydstie reports.

JOHN YDSTIE: The Treasury's plan to restore confidence in Fannie Mae and Freddie Mac clearly alarmed Senator Jim Bunning. The Republican from Kentucky suggested it gave him a sort of "Twilight Zone" moment.

Senator JIM BUNNING (Republican, Kentucky): When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States of America that the current Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants.

YDSTIE: Essentially, Bunning is correct. But Treasury secretary Henry Paulson told him that while he did want unlimited authority, he had no plans to use it.

Secretary HENRY PAULSON (U.S. Department of Treasury): There is no proposal today to inject federal funds in these companies at this time.

YDSTIE: Paulson said the Treasury secretary needs the authority to use an unlimited amount of money to lend to Fannie and Freddie or buy their stock in order to convince investors that Fannie and Freddie remained viable. But why not set some limits, senators wanted to know, after all Fannie and Freddie have trillions of dollars of exposure. Paulson said limits would be tested by the markets.

Sec. PAULSON: If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out; you're not likely to take it out. By having something that is unspecified, it will increase confidence, and by increasing confidence, it will greatly reduce the likelihood it will ever be used.

YDSTIE: Bunning was unconvinced and argued investors were unconvinced too.

Sen. BUNNING: The market has reacted to your plan, Secretary Paulson, by driving down Fannie Mae shares 26 percent today, right now, and Freddie Mac's are down 29 percent.

YDSTIE: Paulson responded that the real test of confidence in the plan was not share prices, but the willingness of companies to lend money to Fannie and Freddie at reasonable rates. And he pointed out that yesterday, Freddie Mac borrowed three billion dollars in the credit markets at interest rates only slightly above those paid by the government.

Bunning was, by far, the most skeptical senator. He said he would do everything he could to block the plan, suggesting he would filibuster it. That led to this comment to Paulson from Democrat Charles Schumer of New York.

Senator CHARLES SCHUMER (Democrat, New York): Which that means we need 60 votes, so we have to do this in a bipartisan way. And we just need your commitment and the president's that they're going to do everything they can to get this done and done quickly.

YDSTIE: Originally, today's hearing had been scheduled to get the semiannual report on the economy from Federal Reserve chairman Ben Bernanke. He did that in abbreviated form before the discussion about Fannie Mae and Freddie Mac began.

Bernanke said the Fed was forecasting continued very sluggish growth in the economy. He said the danger of slower growth and higher inflation had both increased, posing a big challenge for Fed policymakers. And he said, rising oil prices and falling home prices remain at the heart of the country's economic problems.

Mr. BEN BERNANKE (Chairman, Federal Reserve): I think if it were to happen that there would become a general view that the housing system - situation had stabilized, I think you would see, actually, a very strong bounce back in the economy and the financial markets, and it's the uncertainty about when that happens that remains a problem.

YDSTIE: For that reason, Bernanke told the senators, it is crucial to pass the legislation supporting Fannie Mae and Freddie Mac along with other housing rescue measures.

John Ydstie, NPR News, Washington.

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