WASHINGTON - FEDERAL Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday the United States risks a recession, with higher unemployment and increased home foreclosures, if lawmakers fail to act on the Bush administration's plan to bail out the financial industry.
Mr Bernanke told the Senate Banking Committee that failure to act 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.
Mr Bernanke's remarks came in response to a question from Senator Chris Dodd, a Democrat and the committee's chairman, who seemed eager to hear a strong rationate 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.'
Gross domestic product is a measure of growth, and a decline correlates with a recession. Mr Bernanke and Treasury Secretary Henry Paulson urged Congress earlier on Tuesday to swiftly pass a US$700-billion (S$989 billion) Wall Street bailout, warning the entire US economy was at risk.
The warnings came as President George W. Bush vowed before world leaders at the United Nations that US lawmakers would approve the country's largest financial bailout since the Great Depression of the 1930s.
Mr Bernanke told lawmakers that despite the unprecedented steps already taken by the Republican administration to confront the crisis, global financial markets 'remain under extraordinary stress'.
Action was 'urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy,' he said in remarks prepared for delivery.
But the proposal to give the Treasury unprecedented authority to borrow US$700 billion to buy toxic mortgage-related assets from struggling financial institutions has met with stiff opposition from some lawmakers.
They have signaled they will not be hurried into approving such a massive US government financial intervention, and have called for proper oversight measures to be put in place to prevent future problems.
Nervous global markets were on Tuesday focused on the grilling that Mr Bernanke and Mr Paulson faced from the Senate Banking Committee, as the two men urged lawmakers to quickly approve the plan unveiled only days ago.
Democratic congressional leaders and some Republican colleagues have insisted the bailout include sweeping safeguards and oversight to protect American taxpayers.
Global equities markets sank amid growing doubts about the prospects for the US bailout's swift passage. US shares had plunged Monday but were trading modestly higher Tuesday morning as investors watched the skirmish in Congress.
Mr Bush assured worried world leaders that his administration was working to avert a financial meltdown.
'I can assure you that my administration and our Congress are working together,' he said in his farewell address to the UN General Assembly. 'I'm confident we will act in the urgent timeframe required.'
But lawmakers remain cautious.
'I'm prepared to act quickly but I'm not going to act irresponsibly. If it takes longer, so be it,' said Senator Chris Dodd, chairman of the Senate Banking Committee.
Mr Dodd said he was 'angry' about being faced with a crisis that was 'a preventable, avoidable situation' created by a political climate he described as 'basically an eight-year coffee break'.
'You had regulators sitting back as loans were being made with no documentation ... predatory lenders taking advantage of the situation - that's how this all unfolded. It's not a mystery,' Mr Dodd said.
Mr Dodd has proposed a number of amendments to the package, including a provision to allow the government to take a stake in the companies it bails out, limits on compensation for company bosses and severance packages of the rescued firms and additional help for American homeowners facing foreclosures.
Democratic Senator Hillary Clinton said she agreed with those ideas and was putting forth proposals of her own.
'I would like to make sure we have oversight and accountability in this immediate package,' she said in a separate CNN interview.
Mr Bernanke underscored the urgency of the swiftly escalating global credit squeeze.
'At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,' Mr Bernanke pleaded.
Mr Paulson echoed the central bank chief's comments, warning that if Congress did not act quickly, a credit crisis could threaten 'all parts of our economy'.
Mr Paulson warned against losing the 'bipartisan consensus' on the urgency of the bailout with attempts to lard the bill with add-ons.
'We need to build upon this spirit to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don't have broad support,' he said.
Mr Bernanke said the plan to buy up illiquid assets would create liquidity in the market and reduce uncertainty.
And he added it would also 'help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth'. -- AFP, AP