WASHINGTON — Irritated lawmakers grilled Federal Reserve Chairman Ben Bernanke Tuesday over the latest bailout of American International Group, even as the Fed chief warned that an economic recovery hinges on the government's success in stabilizing shaky financial markets and their major players.
"I share your concern, I share your anger," Bernanke told the Senate Budget Committee. "It's a terrible situation, but we're not doing this to bail out AIG or their shareholders. We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."
The Treasury Department and the Fed on Monday threw a new $30 billion lifeline to the ailing insurance giant, which marked the government's fourth effort to stabilize AIG since September.
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Both Democrats and Republicans expressed skepticism over whether the action would work, said they were worried that more taxpayer money will be needed to rescue the company and demanded more accountability and openness.
Bernanke defended the government's repeated rescue attempts on AIG, saying "the failure of major financial firms in a financial crisis can be disastrous for the economy."
The U.S. will be better off "moving aggressively" to solve economic problems because the alternative "could be a prolonged episode of economic stagnation," Bernanke said.
AIG is so big and sprawling, so intertwined with institutions around the globe, that its downfall could set off a vicious chain reaction. Upheaval on such a global scale would plunge the U.S. economy deeper into recession, drive up unemployment and stifle hopes for an economic rebound any time soon.
"We really had no choice," Bernanke said. "Bankruptcy is just not a good option."
But that did little to soothe lawmakers.
"We're no better off," huffed Sen. Jim Bunning, R-Ky. "The bottom line: the Fed and the Treasury will leave the door open for more bailouts in the future."
Sen. Ron Wyden, D-Ore., and others said the identities of banks and other so-called counterparties that do business with AIG and other bailed-out institutions should be made public. Those companies also should have to make some concessions, he added.
"They ought to have some kind of consequences," Wyden said. "There is time for some sunlight ... the public wants to know why are these people so important?"
In the last 18 months of the financial crisis, Bernanke said the AIG episode has made him the most angry.
"AIG exploited a huge gap in the regulatory system; there was no oversight of the financial products division," he said. "This was a hedge fund basically that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses."
Sen. Benjamin Cardin, D-Md., worried about the "influx of money to AIG and elsewhere — will we get the results that we anticipate?"
Bernanke said he was hopeful improvements would eventually come.
In fact, the Fed chief said the effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery."
President Barack Obama's recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and "mitigate the overall loss of employment and income that would otherwise occur," Bernanke said.
However, Bernanke warned that the timing and magnitude of the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face."
The recession, now in its second year, is inflicting more damage to the economy daily as layoffs mount and companies cut production.
The economy contracted at a staggering 6.2 percent in the final three months of 2008, the worst showing in a quarter-century, and the Fed has said it will probably shrink during the first six months of this year. Recent economic barometers "show little sign of improvement," Bernanke said.
The nation's unemployment rate in January jumped to 7.6 percent, the highest in more than 16 years. And the number of newly laid-off people signing up for unemployment benefits has risen since mid-January, "suggesting that labor market conditions may have worsened further in recent weeks," Bernanke said.
The government will release February unemployment data on Friday and many economists are predicting the unemployment rate rose to 7.9 percent last month while employers cut nearly 650,000 jobs.
With jobs vanishing, nest eggs cracking and home values tanking, consumers have reined in their spending. That has forced companies to lay off workers, trim production and cut back in other ways. It's a vicious circle of negative forces that feed on each other, deepening the recession.
In back-to-back appearances on Capitol Hill last week, Bernanke planted a seed of hope that the recession could end this year if the government was successful in turning around wobbly financial markets. But the Fed chief didn't repeat that remark in Tuesday's testimony.
Bernanke said the government has made some progress on the financial front since last fall, but he told lawmakers that "more needs to be done."
The Obama administration has revamped a $700 billion financial bailout program aimed at strengthening banks, but has said additional money could be needed.
Obama's first budget holds out the possibility of spending $250 billion more for additional financial industry rescue efforts.
"Whether further funds will be needed depends on the results of the current (stress tests) of banks, the evolution of the economy and other factors," Bernanke said.
The price of such bold action will push the nation's federal budget deficit to nearly $1.8 trillion this year, and above $1 trillion in 2010 and 2011, he said. Of the deficits, "I'm afraid they are unavoidable" to get the economy on a recovery path, Bernanke said.
Asked whether Obama's economic assumptions in his budget are too rosy, Bernanke said although they are a little more optimistic than the Fed's projections, "these things are hard to predict with precision."