Bernanke answers congress' questions (Deniece's Notes - Part II)

Mr. Paul comments: Price fixing is to be avoided. That is what prolonged the depression. Where is the $700 Billion coming from? He says prices should go down, rather than fixing them irregularly high. Asks where is the authority to buy illiquid assets?

Bernanke agrees that price fixing was bad during the depression. Federal reserve system took no action in the depression.

Ms. Klobuchar: How will the huge debt hurt our long term economy?

Bernanke: Agrees critically important to have a stable, responsible fiscal plan including considering not fully funded programs. He is unhappy by the fiscal implications of this, but feels doing nothing is even worse.

Klobuchar: Ways to pay for it rather than putting it on the backs of the middle class. If we have been talking about being an extraordinary time, why can't we consider taxing those who make more than $1MM per year for the first time as an extraordinary position?

Bernanke: That is congress' job to consider. We need sane fiscal programs.

Klobuchar: Paulson doesn't support executive pay decreases. Can there be terms to them taking the money?

Bernanke: There are issues of golden parachutes and others that need to be addressed. He hopes they do not cause the time for action to take so long as to change the house. Buying simple mortgages of the past is not the same as buying complex securitized mortgages of today.

Mr. Brady: More specific about consequences if no action. Is there a range you can give us with the loss?

Bernanke: Credit not working normally. Corporations not being able to finance themselves through commercial paper. It will affect he broad economy through lack of available credit. A significant deterioration in the broad economy. This is the most significant financial crisis in the post war period that is having a global effect.

In Japan growth was suboptimal for half of a decade.

Brady: We are being asked to walk away from every principal we have in considering a solution. Constituents do not want to reward risky behavior. Why don't we let free markets correct themselves?

Bernanke: The pain would be very significant. It would be very costly to average people. Better solution to recognize things went wrong. Taxpayers can be protected in doing that. Second part of program is to look at regulatory system to assure it does not happen again.

Senator Bingham: Hears that getting more capital into financial institutions is best solution now. Taking troubled assets off of books is a good option. When Warren Buffet invests, he gets preferred stock. That is seen as a good thing, as an infusion of capital, it helps the stockholders, it is a good investment for Warren Buffet. Concerned way this is being presented to congress, they are being asked to take assets off of company hands, with taxpayer hands. There may be a profit to the taxpayer, as there would to Buffet.

Bernanke: There is a concern that investors might view this as a prelude to forceable capital injections which would wipe out regular stockholders. Hears that there is concern about effective capitalization with this solution and suggests we talk with white house about a more investment point of view. There is nothing wrong with discussing this option with the treasury.

Mr. English: Architecture outlined gives extraordinary power in making extraordinary power in the economy and has political implications. Do we risk politicizing this issue?

Bernanke: If we don't want to stigmatize those participating in asset sales, it is appropriate that congress have oversight over this program. There should be principles it is based on. It should give comfort to taxpayers conveying that it is being handled in a concerned and trustworthy manner. Agrees needs oversight.

Derivitives played an important role in the turbulence of financial markets. Chopping up mortgage products was supposed to distribute risk. Transparency was decreased. Credit rating agencies also need to be looked at who were blessing opaque lending habits.

Mr. English: Were rating agencies too casual in making their assessments? Is it a regulatory failure? Is it a congressional oversight?

Bernanke: There has been a number of domestic and international studies who have put everything mentioned on the list for blame. Regulators not sufficiently attentive to risks of derivative instruments. Private sector in its zest for financial innovation underestimated risk for uncertainty.