Stability of US financial system under ‘grave threat’: Bernanke

September 25th, 2008 - 1:46 am ICT by IANS  

Washington, Sep 25 (DPA) US Federal Reserve chief Ben Bernanke Wednesday defended the US government’s unprecedented interventions in capital markets over the past months, telling Congress that the stability of the US financial system faced “grave threats”.He painted a gloomy picture for future growth, saying “greater- than-normal uncertainty” surrounded any forecast of the pace of activity.

“The downside risks to the outlook … remain a significant concern,” Bernanke told the Joint Economic Committee of the US Congress.

Bernanke fleshed out some of the points he made Tuesday before a sceptical Senate panel that is considering the government’s proposed $700-billion bailout of toxic mortgage debt and securities.

“Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk,” Bernanke said.

The plan is just the latest in a series of desperate moves by the US central bank and Treasury Department to stem losses caused by bad mortgage debts and related unregulated securities that have brought the banking system and the nation’s economy to the brink of ruin.

“If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse,” he said. “I urge the Congress to act quickly to address the grave threats to financial stability that we currently face.”

Bernanke projected continuing high inflation, a weakening labour market and decelerated economic activity. Since November 2007, the country has lost 770,000 jobs and boosted unemployment to 6.1 per cent.

Bernanke, whose role in the economy is normally one of boosting confidence in the system and the economic outlook, described a series of failed attempts to find private-sector solutions to the threatening collapses over the past year.

“None was forthcoming,” he said.

There was no alternative, he said, to the $200-billion bailouts of Freddie Mac and Fannie Mae mortgage companies and the $85- billion prop for insurance giant American International Group (AIG).

But he boasted that in the case of AIG, the government has extracted an 80 percent interest in the firm and will be cashing in on an 11 percent interest rate on the loan.

As he has over the past week, since Lehman Brothers investment house declared its $600-billion bankruptcy, Bernanke said the Federal Reserve and Treasury decided to let that one go.

“The failure of Lehman posed risks,” he said, according to a transcript of his prepared testimony. “But the troubles at Lehman had been well known for some time, and investors clearly recognized … that the failure of the firm was a significant possibility.”

Nonetheless, within days after Lehman Brothers collapse, AIG - which had insured many of the high-risk, unregulated mortgage debt securities that have been the undoing of investment banks - also came knocking for help, contributing to the “development last week of extraordinarily turbulent conditions in global financial markets,” Bernanke said.

As a result, share prices continue to fall, “the cost of short- term credit - where available” has spiked upwards, and liquidity has dried up in many markets, the central bank head said.

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