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Federal Reserve Chairman Ben Bernanke bluntly
warned Congress on Tuesday it risks a recession, with higher
unemployment and increased home foreclosures, if lawmakers fail to
pass the Bush administration's $700 billion plan to bail out the
financial industry.

      Bernanke told the Senate Banking Committee that inaction could
leave ordinary businesses unable to borrow the money they need to
expand and hire additional employees, while consumers could find
themselves unable to finance big-ticket purchases such as cars and
homes.


      Bernanke's remarks came in response to a question from Sen.
Chris Dodd, D-Conn., the committee's chairman, who seemed eager to
hear a strong rationale for lawmakers to act swiftly on the
administration's unprecedented request.


      "The financial markets are in quite fragile condition and I
think absent a plan they will get worse," Bernanke said.


      Ominously, he added, "I believe if the credit markets are not
functioning, that jobs will be lost, that our credit rate will
rise, more houses will be foreclosed upon, GDP will contract, that
the economy will just not be able to recover in a normal, healthy
way."


      GDP is a measure of growth, and a decline correlates with a
recession.


      Bernanke outlined his grim scenario as committee members sat in
silence, and as the Bush administration pressed lawmakers publicly
and privately to act speedily.

      Vice President Dick Cheney and Jim Nussle, the Bush
administration's budget director, met privately with restive House
Republicans, some of whom emerged from the session unpersuaded.


      "Just because God created the world in seven days doesn't mean
we have to pass this bill in seven days," said Rep. Joe Barton,
R-Texas.


      Added Rep. Darrell Issa, R-Calif., "I am emphatically against
it."


      Dodd and other key Democrats have been in private negotiations
with the administration since the weekend on legislation designed
to allow the government to buy bad debts held by banks and other
financial institutions.

      Despite expressions of unhappiness in both parties, the
prospects for legislation seemed strong, with lawmakers eager to
adjourn this week or next for the elections.


      Differences remained, though, including a demand from many
Democrats and some Republicans to strip executives at failing
financial firms of lucrative "golden parachutes" on their way out
the door.


      The administration balked at another key Democratic demand:
allowing judges to rewrite bankrupt homeowners' mortgages so they
could avoid foreclosure.


      Despite the unresolved issues, President Bush predicted the
Democratic-controlled Congress would soon pass a "a robust plan to
deal with serious problems." He was speaking to the United Nations
General assembly.


      Stocks held steady in pre-noon trading on Wall Street as
Treasury Secretary Henry Paulson told the Senate Banking Committee
that quick passage of the administration's plan is "the single
most effective thing we can do to help homeowners, the American
people and stimulate our economy."


      But even before Paulson could speak, lawmakers expressed
unhappiness, criticism of the plan and - in the case of some
conservative Republicans - outright opposition.


      "I understand speed is important, but I'm far more interested
in whether or not we get this right," said Dodd, who spoke first.
"There is no second act to this. There is no alternative idea out
there with resources available if this does not work," he added.


      Sen. Richard C. Shelby of Alabama, the panel's senior
Republican, was even more blunt. 

"I have long opposed government
bailouts for individuals and corporate America alike," he said.


Seated a few feet away from Paulson and Bernanke, he added, "We
have been given no credible assurances that this plan will work. We
could very well send $700 billion, or a trillion, and not resolve
the crisis."


      The legislation that the administration is promoting would allow
the government to buy bad mortgages and other troubled assets held
by endangered banks and financial institutions. 


Getting those debts
off their books should bolster their balance sheets, making them
more inclined to lend and easing one of the biggest choke points in
the credit crisis. If the plan works, it should help lift a major
weight off the sputtering economy.


      Buttressing Paulson's comments, Bernanke said action by
lawmakers "is urgently required to stabilize the situation and
avert what otherwise could be very serious consequences for our
financial markets and for our economy."


      A third witness, Securities and Exchange Commission Chairman
Christopher Cox, urged Congress to regulate a type of corporate
debt insurance that figured prominently in the country's financial
crisis.


      "I urge you to provide in statute the authority to regulate
these products to enhance investor protection and ensure the
operation of fair and orderly markets," he said. The debt
insurance is known as credit default swaps.


      So far this year, a dozen federally insured banks and thrifts
have failed, compared with three last year. The country's largest
thrift, Washington Mutual Inc., is faltering.


      Republicans said the sheer size of the bailout would cost each
man, woman and child in the United States $2,300.


      If approved and implemented, that could push the government's
budget deficit next year into the $1 trillion range - far and away
a record.


      Sen. Barack Obama, the Democratic presidential candidate,
pointed to other potential consequences, as well. In an interview
with NBC, he said that if he wins the White House, he would likely
have to phase in the proposals he has outlined for new federal
spending. He did not elaborate.


      Congressional Republicans, in particular, piled on the criticism
of the administration's suggested solution to the crisis.


      "This massive bailout is not a solution, It is financial
socialism and it's un-American," said Sen. Jim Bunning, R-Ky.

      Dodd and others indicated that the stakes are too high for
Congress not to act, but they made clear they would insist on
changes in the administration's weekend changes.


      Dodd said the administration's initial proposal would have
allowed the Treasury secretary to "act with utter and absolute
impunity - without review by any agency or court of law" in
deciding how to administer the envisioned bailout program.


      "After reading this proposal, I can only conclude that it is
not just our economy that is at risk, Mr. Secretary, but our
Constitution, as well," Dodd said.


      The U.S. has taken extraordinary measures in recent weeks to
prevent a financial calamity, which would have devastating
implications for the broader economy. 


It has, among other things,
taken control of mortgage giants Fannie Mae and Freddie Mac,
provided an $85 billion emergency loan to insurance colossus
American International Group Inc. and temporarily banned short
selling of hundreds of financial stocks.

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Business and Economic News

Federal Reserve Chairman Ben Bernanke bluntly
warned Congress on Tuesday it risks a recession, with higher unemployment and increased home foreclosures, if lawmakers fail to pass a $700 billion plan to bail out the financial industry.

Bernanke: Recession certain in absence of bailout

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