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Bernanke vows clarity in financial crisis fight

Federal Reserve Chairman Ben Bernanke told Congress Tuesday he’ll to keep Americans better informed about efforts to battle the worst financial crisis since the 1930s.
Image:  Ben Bernanke
While acknowledging that measuring the impact of the Fed’s programs is complicated because many factors affect market conditions, Chairman Ben Bernanke said the central bank was encouraged by feedback from Wall Street and others. Jonathan Ernst / Getty Images
/ Source: The Associated Press

Federal Reserve Chairman Ben Bernanke told Congress Tuesday that a flurry of radical programs aimed at busting through debilitating credit clogs are showing promise and pledged to keep Americans better informed about efforts to battle the worst financial crisis since the 1930s.

While acknowledging that measuring the impact of the Fed’s programs is complicated because many factors affect market conditions, Bernanke said the central bank was encouraged by feedback from Wall Street and others.

“Our lending to financial institutions, together with action taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements” in bank-to-bank lending, Bernanke said in testimony to the House Financial Services Committee.

Specifically, a Fed program to buy mounds of “commercial paper” has helped to relieve strains for many companies that rely on this crucial short-term financing to bankroll everyday expenses like payrolls and supplies, Bernanke said.

Another program has bolstered the money market mutual fund industry as sharp withdrawals seen in September have since waned. And a program to buy mortgage debt has helped to drive down mortgage rates, he said.

A program aimed at increasing the availability of consumer loans is being expanded and should be “operational shortly,” Bernanke said. The central bank recently said the program, which will provide financing to spur auto, student and other consumer loans as well as loans to small businesses, is expected to launch sometime this month.

It also will include commercial real estate and get more seed money from the government’s bailout fund — $100 billion versus the $20 billion initially provided.

With those changes, announced earlier Tuesday by Treasury Secretary Timothy Geithner, the program will be able to support as much as $1 trillion in lending, up from $200 billion first announced in late November.

If the consumer lending program works as planned, “it should help to restart activity” in these key markets, Bernanke said.

The Fed chief appeared just hours after Geithner unveiled a multi-pronged attack to get credit flowing freely again and to restore stability to financial markets by using the second, $350 billion installment of the $700 billion bailout fund.

But investors appeared wary of the government’s latest plans. The Dow Jones industrial average plunged more than 380 points, reflecting Wall Street’s growing concerns about the government’s ability to revive the banking industry.

“We can’t expect immediate results,” Bernanke told lawmakers, some of whom wondered about the effectiveness of the government’s efforts so far. “We have to be patient,” the Fed chief added.

Bernanke said the Fed will keep looking for new tools and expand existing ones as needed to turn the situation around.

Critics worry the Fed’s actions have the potential to put ever-more taxpayers’ dollars at risk and encourage “moral hazard,” where companies feel more comfortable making high-stakes gambles because the government will rescue them.

“You can imagine, there is some distrust,” Rep. Brad Sherman, D-Calif., told Bernanke.

To assuage those concerns, Bernanke said the Fed is developing a new Web site that will provide detailed information on its efforts. The Fed hopes to have the site operational within a few weeks.

And the Fed’s No. 2 official, vice chairman Donald Kohn, is leading a committee to review the central bank’s disclosure policies related to its lending programs and its balance sheet, which outlines its efforts to ease credit problems by providing loans and buying debt.

“The presumption of the committee will be that the public has a right to know,” Bernanke said.

However, Bernanke had reservations about publicly releasing the identities of banks and other financial institutions that draw emergency overnight loans from the Fed. Providing such information would “destroy the program,” he said. The information has been kept confidential for years to prevent a run on banks.

Poor communications with Congress and the American public marred the rollout of the first $350 billion in bailout money, Bernanke said. The biggest mistakes were inadequate communications and explanation, he added.

“The American people have complained a lot, and I don’t blame them,” Bernanke said, while adding that “these steps as distasteful as they are — are essential.”

Besides its spate of bold programs, the Fed has ratcheted down its key interest rate to an all-time low. The central bank is expected to keep the targeted range for its key rate between zero and 0.25 percent for the rest of this year to help brace the economy, which has been stuck in a recession since December 2007.

This recession has been especially stubborn because its root causes — housing, credit and financial crises — have been the worst since the 1930s and don’t lend themselves to quick fixes.

“As you know, the past 18 months or so have been extraordinarily challenging for policymakers around the globe, not least for central banks,” Bernanke told lawmakers.

In other controversial moves, the Fed last year provided financial backing for JPMorgan Chase’s take over of Bear Stearns, and bailed out insurer American International Group.

Bernanke told lawmakers the Fed doesn’t anticipate losing money on any of its relief actions. He said that 95 percent of the Fed’s programs are mostly short-term financing and “extremely safe,” accounting for $1.9 trillion. The remaining 5 percent — which account for another $100 billion and are related to the bailout of Bear Stearns and AIG — are “a bit less secure,” he said.

All those actions were made to ease deep credit and financial stresses, which have severely hurt the economy — “not because we have some nefarious scheme,” Bernanke said.

To help squeezed municipalities, Bernanke suggested Congress consider setting up a lending program, citing limitations on the Fed’s authority in this area.

The Fed chief repeated his call for Congress to enact legislation so the collapse of a huge financial institution can be handled in an orderly way — similar to how bank failures are handled by the Federal Deposit Insurance Corp. — to minimize fallout to the financial system and to the national economy.