Chairman Ben Bernanke explains why the Fed “bailed out” Bear Stearns

Chairman of the Federal Reserve System Board of Governors Ben Bernanke testified at the Joint Economic Committee Hearing on “The Economic Outlook,” attempting to explain to the committee why the Federal Government moved to save Bear Stearns from compete failure but is doing nearly nothing to save homeowners from foreclosures. “Normally,” Bernanke said, “the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company… with financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.”

In his opening statement, Chairman Charles E. Schumer (D-NY) said it was “hard to disagree” with a need to take quick action to avoid the kind of meltdown as seen in the Great Depression, but wanted to know what justice there was in helping Bear Stearns and not millions of homeowners. He compared the actions taken by the Federal Reserve to moving at “a snail’s pace, if at all.” There are six principles to moving forward, Schumer said, and above all, the focus should be on controlling systemic risk. The regulatory system should be unified and simplified, the unregulated parts of the financial markets should be regulated, there must be greater transparency, and the “Laissez-faire view of this administration” in regards to “no regulation is good,” needs to end.

Congresswoman Carolyn Maloney (D-NY) stressed the need for a bipartisan economic summit and said that there was a need to move quickly to “keep families in their homes and blunt the devastating effects of the weakening economy.” She compared the Fed’s creative, unprecedented, and controversial steps to ease the credit crunch to “the spontaneous improvisation of jazz.” Wall Street has been helped, she said, and now it is time to help Main Street.

With a slightly trembling voice that belied his calm demeanor and instead evidenced his nervousness at appearing before the Committee, Bernanke said that although recent actions appear to have helped stabilize the situation somewhat, the financial markets remain under “considerable stress.” Effects of the financial strains on credit cost have been increasingly evident, he said, and some portions of the system that had previously escaped the worst of the turmoil have been affected. “These developments in financial markets– which themselves reflect, in part, greater concerns about housing and the economic outlook more generally– have weighed on real economic activity,” Bernanke said.

He said he expects the tax rebates to provide support to consumer spending, and also that he expects economic activity to strengthen in the second half of the year. Inflation, though, has been a source of concern. The pickup in inflation has been the result of increases in price of crude oil, agricultural products, and other globally traded commodities, Bernanke said. In addition, the decline in the foreign exchange value of the dollar has also contributed to inflation. “We expect inflation to moderate in coming quarters,” he said, explaining that the expectation is based in part on futures markets’ indications of a leveling out of prices for oil and other commodities. Clearly, he said, the U.S. economy is going through a very difficult period. Much financial adjustment has already taken place, and he said he remains confident in our economy’s long-term prospects.