The nation's leaders are running
out of answers to America's
economic crisis.
The Federal
Reserve has no more practical
room to push interest rates
lower; there's only so much
taxpayer money for shoring up
housing, and if depositors lose
confidence, there's little
officials can do to stop a run
on banks.
President
Bush, speaking from a White
House podium, and Federal
Reserve Chairman Ben Bernanke,
in testimony to a congressional
committee, sought on Tuesday to
soothe jittery markets and
reassure Americans that the U.S.
financial system remains
basically sound
despite the
current turmoil
But they both
tempered their remarks with
warnings and expressions of
uncertainty.
Bernanke
warned that the U.S. economy
faces "numerous difficulties,"
that the outlook for inflation
is unclear and that "financial
markets and institutions remain
under considerable stress."
Bush told a news conference:
"The president doesn't have a
magic wand."
He was answering a question
about soaring fuel prices but
his remarks seemed to sum up the
government's overall
predicament.
After years of
seeming tame, inflation is again
on the rise, led by higher food
and fuel costs. But the Fed,
which usually fights inflation
by boosting interest rates,
finds itself unable to use that
weapon any more - it already has
pushed rates down to 2 percent
from 5.25 percent in response to
the housing crisis - without
threatening to undermine an
economy that is either in
recession or growing anemically.
With soaring
budget deficits, swollen from
the costs of wars in Iraq and
Afghanistan and increased
spending on homeland security,
there's only so much taxpayer
money for bailing out failing
financial institutions.
Stocks are in
a bear market, and shares of
banks and other financial
companies have been pounded.
"I fear that we're sitting on a
financial powder keg," Bernanke
was told by Sen. Richard C.
Shelby of Alabama, senior
Republican on the Banking
Committee.
Mortgage
giants Fannie Mae and Freddie
Mac hold or guarantee about half
the home mortgages in the United
States. Their stocks have lost
about 80 percent of their value
over the past year. Over the
weekend, the two were thrown a
lifeline by the Treasury
Department and the Fed. But if
investor jitters prevent them
from being able to sell bonds to
finance new mortgages, it could
have far-reaching economic
consequences.
And the risk
of runs on banks is still
present, although minimized by
federal deposit insurance on
accounts up to $100,000 and by
other federal safeguards.
Regulators
seized IndyMac, a large
California-based savings and
loan bank, on Friday after
hundreds of depositors lined up
to withdraw funds at branches.
The bank reopened Monday under
federal control.
Bush counseled
calmness. "I happened to witness
a bank run in Midland, Texas,
one time. I'll never forget the
guy standing in the bank lobby
saying, your deposits are good.
We got you insured. You don't
have to worry about it if you
got less than $100,000 in the
bank. The problem was, people
didn't hear. And there's a ...
nervousness. My hope is, is that
people take a deep breath and
realize that their deposits are
protected by our government."
But nearly $1
billion of IndyMac's
approximately $19 billion in
deposits was uninsured,
according to the Federal Deposit
Insurance Corp.
The
administration unveiled a U.S.
rescue plan for Fannie Mae and
Freddie Mac but has not put a
price tag on it. Treasury
Secretary Henry Paulson said the
administration did not intend to
nationalize the companies and
wanted to preserve their
shareholder-owned structure.
Still, he said a regulatory
overhaul was needed.
Congress is
also working on legislation that
would modernize the Federal
Housing Administration and
create a new regulator and
tighter controls for Fannie Mae
and Freddie Mac.
If the
government wound up taking over
the two companies, it would have
to assume more than $5 trillion
in mortgage debt that the two
companies now either own or
back. That would add to a
federal debt fast approaching
the $10 trillion mark.
Bernanke
defended the Fed's decision to
help rescue Bear Stearns, as
well as Fannie and Freddie. If
problems aren't contained, they
can ripple throughout the
economy, hurting everyone, he
said. "Financial stability is
critical to economic stability."
David Jones,
an economist at DMJ Advisors and
a longtime Fed watcher, said
Bernanke's testimony suggested
that the Fed's "emphasis has
shifted to financial stability,"
perhaps signaling that it will
leave interest rates unchanged
until late 2008.
There are some things that could
be done, but they may not be
politically viable.
