Federal Reserve Chairman Ben Bernanke bluntly warned Congress today it risks a recession, with higher unemployment and increased home foreclosures, if lawmakers fail to pass the Bush administration's $700 billion plan to bail out the financial industry.
Bernanke told the Senate Banking Committee that inaction could leave ordinary businesses unable to borrow the money they need to expand and hire additional employees, while consumers could find themselves unable to finance big-ticket purchases such as cars and homes.
Bernanke's remarks came in response to a question from Sen. Chris Dodd, D-Conn., the committee's chairman, 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, [Gross Domestic Product] will contract, that the economy will just not be able to recover in a normal, healthy way."
Vice President Dick Cheney and Jim Nussle, the Bush administration's budget director, met privately with restive House Republicans, some of whom emerged from the session unpersuaded.
"Just because God created the world in seven days doesn't mean we have to pass this bill in seven days," said Rep. Joe Barton, R-Texas. Added Rep. Darrell Issa, R-Calif., "I am emphatically against it."
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.
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.
Despite the unresolved issues, President Bush, while speaking at the United Nations, predicted the Democratic-controlled Congress would soon pass a "a robust plan to deal with serious problems."
Stocks held steady in pre-noon trading on Wall Street as Treasury Secretary Henry Paulson told the Senate Banking Committee that quick passage of the administration's plan is "the single most effective thing we can do to help homeowners, the American people and stimulate our economy."
But financial markets resumed their pullback as investors worry that lawmakers are losing a sense of urgency on a proposed bailout for financial institutions. Investors watched Treasury Secretary Henry Paulson and Federal Reserve Chairman Hank Paulson testify before Congress during the session.
And as they watched, the market grew concerned that efforts to work out a $700 billion financial rescue plan are facing a greater degree of second-guessing from lawmakers than expected.
Still, trading was more orderly than Monday, when investors rushed into hard assets like oil and gold.
The Dow Jones industrials ended down 161 at the 10,854 level. But even before Paulson could speak, lawmakers expressed unhappiness, criticism of the plan and — in the case of some conservative Republicans — outright opposition.
"I understand speed is important, but I'm far more interested in whether or not we get this right," said Dodd, who spoke first.
"There is no second act to this. There is no alternative idea out there with resources available if this does not work," he added. Sen. Richard C. Shelby of Alabama, the panel's senior Republican, was even more blunt.
"I have long opposed government bailouts for individuals and corporate America alike," he said. Seated a few feet away from Paulson and Bernanke, he added, "We have been given no credible assurances that this plan will work.
We could very well send $700 billion, or a trillion, and not resolve the crisis."