WASHINGTON — Taking care not to declare victory, the chairman of the Federal Reserve and the secretary of the treasury told Congress on Tuesday that the unprecedented rescue efforts over the past eight weeks appear to have prevented the collapse of financial markets and returned them to a semblance of normalcy.
Reviewing the progress of the Wall Street rescue package that Congress passed Oct. 3, Fed Chairman Ben Bernanke said that stability had returned after the surprise decision to inject $250 billion into U.S. banks and thrifts, coupled with the Fed's decision to bypass banks and lend directly to U.S. corporations in need of capital.
"These actions, together with similar measures in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms," Bernanke told the House Financial Services Committee.
Defending his implementation of the rescue effort, Treasury Secretary Henry Paulson said success must be judged by what hadn't happened instead of what had.
"When the financial markets have problems they hurt the economy, so the reason it was very important to get in quick and stabilize was to mitigate damage to the economy," Paulson said, suggesting that it isn't fully appreciated that collapse was avoided.
Lawmakers, however, were more interested in the Treasury's announcement last week that it was tearing up its playbook and wouldn't be purchasing distressed mortgage assets to purge bank balance sheets of bad investments.
That was shocking, since federal monies under the rescue program are being distributed via the Troubled Asset Relief Program. That remains the program's name, but troubled assets aren't being purchased.
"There are four pages of specific authorization to buy up mortgages and write them down (with losses)," Committee Chairman Rep. Barney Frank, D-Mass., said angrily, waving pages from the bill at Paulson. "The bill is replete with authorizations to you."
Paulson responded that he shifted the program's focus to shoring up banks after global financial markets nearly collapsed. He acknowledged that he was unlikely to spend the remaining $350 billion authorized under the bill and would leave decisions on how best to spend it to the incoming administration of President-elect Barack Obama.
"We didn't implement a flawed strategy, we implemented a strategy that worked," Paulson said, defending his decision to focus on banks and not do more to prevent foreclosures.
Putting additional heat on the treasury secretary, the chairman of the Federal Deposit Insurance Corp., Sheila Bair, testified that the Bush administration has failed to do enough to address the mortgage crisis, which was the trigger for the biggest U.S. financial crisis since the Great Depression.
"Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health," Bair said, implicitly criticizing the treasury secretary, who was sitting at the witness table with her.
Rep. Maxine Waters, D-Calif., accused Paulson of ignoring the will of lawmakers in the House of Representatives, who needed two tries to get the controversial rescue bill passed last month.
"The purchase of toxic assets was at the center of this program," she told Paulson, accusing him of ignoring troubled mortgages. "The fact that you, Mr. Paulson, took it upon yourself to absolutely ignore the authority . . . just amazes me. I just couldn't believe that you have abandoned the whole foreclosure-mitigation effort."
Paulson has resisted FDIC Chairman Bair's proposal to have lenders and government share the losses for writing down the values of distressed mortgages to levels that reflect current market prices for homes.
The Bair plan is estimated to cost about $24 billion. The treasury secretary frowns on it because it involves spending outright instead of taking investment stakes that eventually may bring a financial return to the taxpayer.
Chairman Frank, who's enjoyed a close working relationship with Paulson, scolded him for blocking $24 billion in spending from a bill that authorized spending up to $700 billion.
"You're talking about 4 percent of the total amount," Frank grumbled.
Bair said that if it were implemented, her plan — which has been tried on a small scale with the failed bank IndyMac — would prevent 1.5 million foreclosures through the end of next year. That, she said, amounts to about a 30 percent reduction in expected foreclosures nationwide.
"It's not a silver bullet, but it is a huge reduction," she testified.
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