Bernanke’s Outside Bailout Pitch

Ben S. Bernanke

Ben Bernanke may not have sold Main Street on the largest bailout in American history, but it isn’t for lack of trying.

The Federal Reserve chairman appeared flustered speaking before Congress Wednesday as politicians skewered the $700.0 billion financial bailout he is backing questioning motivations for the plan and even whether it will work.

“Americans are furious,” said Sen. Chuck Schumer, D-N.Y., chairman of the Joint Economic Committee of Congress. Lawmakers were hearing “amazement, astonishment and intense anger” from their constituents, he said. Yet, he said a deal on a bailout would soon be reached, suggesting that all the Washington pushback may just be grandstanding.

Still, it was the second day the bailout plan got a cool reception from lawmakers. (See “Paulson Plays Pinata.”)

The U.S. — and global — financial system has been rocked over the past year by instabilities arising from the U.S. subprime crisis. Imprudent lending to American homeowners for overpriced real estate has led to a global credit crisis as loan defaults have brought into question the value of mortgage-backed securities that provided the ultimate financing. That has led to a withdrawal of lenders from many of the world’s credit markets, freezing up the banking system and calling into question the value of debt securities and insurance on them. (See “Too Clever By Half” and “Derivatives And Dangerous Times.”)

The bailout that Bernanke and Treasury Secretary Henry Paulson have been advocating on Capitol Hill would involve the government buying illiquid mortgage-related financial products that are currently weighing Wall Street balance sheets. An issue is how much to pay: with the private sector unwilling to bid for these toxic assets, it would be left to the government to put a value on them. An error in either direction would be costly, either saddling taxpayers with overpriced financial junk or forcing financial firms to take unfairly low prices that would not help their situations.

Doing nothing also seems not to be an option — the stock market soared last week on rumors that there would be a bailout and would, presumably, dive if the idea were taken off the table.

Bernanke argued that global financial markets remain under “extraordinary stress” and that worsening conditions could further jeopardize the already-vulnerable U.S. economy. He attempted to appeal to everyday Americans when he painted dire portraits of a future where neither businesses nor consumers would be able to borrow money. He warned that failing to act could bring the economy to a virtual halt: “Choking up of credit is like taking the lifeblood away from the economy,” Bernanke said.

Bernanke said the government should pay for assets at a midpoint between today’s distressed market price and the long-term returns on investment. In response to concerns that this amounts to paying a generous premium with taxpayer money Bernanke said, “I am not advocating the government intentionally ove pay” for the assets.”

As Wall Street weighs the best course of action, International Monetary Fund Managing Director Dominique Strauss-Kahn estimated the overall cost of the global financial crisis has risen to $1.3 trillion from earlier estimates of $1.0 trillion to $1.1 trillion, a spokeswoman said.

After Bernanke’s morning testimony to the Joint Economic Committee, he and Paulson presented the bailout plan to the House Banking Committee.

by: Maurna Desmond – Reuters contributed to this article.

Source: Forbes – Click to see video here