$60b bailout is for everyone: Bernanke

Federal Reserve Chairman Ben Bernanke

Irritated lawmakers grilled Federal Reserve Chairman Ben Bernanke yesterday 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 stabilising 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 Tuesday threw a new US$30 billion ($60 billion) lifeline to the ailing insurance giant, which marked the Government's fourth effort to stabilise AIG since September.

Both Democrats and Republicans expressed scepticism 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 US will be better off "moving aggressively" to solve economic problems because the alternative "could be a prolonged episode of economic stagnation", Bernanke said. Still, 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."

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 US 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 Senator Jim Bunning, a Kentucky Republican. "The bottom line: the Fed and the Treasury will leave the door open for more bailouts in the future."

Senator Ron Wyden, an Oregon Democrat, 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 consequence," Wyden said.

"The American people are in the dark on this issue, and I think it's time for some sunlight. I think that the public really wants to know why are these people so important."

Senator Benjamin Cardin worried about the "influx of money to AIG and elsewhere - will we get the results that we anticipate"?

Bernanke said he was hopeful the rescue efforts would pay off and improvements would eventually come.

"It isn't fair that money is going to big corporations. We are in a situation, though, where we need to stabilise the financial system," Bernanke said. "If we don't stabilise the financial system, we have no hope of getting the economy back to a normal state."

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 stabilise markets "will be critical determinants of the timing and strength of the recovery". President Barack Obama's recently enacted US$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 per cent 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 US unemployment rate in January jumped to 7.6 per cent, 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 labour market conditions may have worsened further in recent weeks", Bernanke said. The government will release February unemployment data on Saturday and many economists are predicting the unemployment rate rose to 7.9 per cent last month. With jobs vanishing, nest eggs cracking and home values tanking, consumers have reined in their spending. That has forced companies to cut back. It's a vicious circle, 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 yesterday'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".

- AP