Bernanke, Paulson: Congress must act now

updated 7:17 p.m. ET Sept. 23, 2008

WASHINGTON - Senators dug in their heels Tuesday, pushing back against dire warnings from the government’s top economic officials of recession, layoffs and lost homes if Congress doesn’t quickly approve the Bush administration’s emergency $700 billion financial bailout plan.

Congressional leaders still predicted passage — with significant changes — but Wall Street’s nerves were hardly soothed. The Dow Jones industrials sank 161 points and now are off more than 500 this week after initially surging on the bailout announcement last week.

Deepening market trouble was just one piece of the economic havoc that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told senators would ensue if Congress lags in acting on the administration’s proposal to rescue tottering financial institutions.

“I share the outrage that people have,” Paulson said. “It’s embarrassing to look at this. I think it’s embarrassing to the United States of America. There is a lot of blame to go around.”

But without the bailout plan, Paulson and Bernanke sketched out a dire scenario for senators at a contentious daylong hearing: Neither businesses nor consumers would be able to borrow money, and the world’s largest economy would grind to a virtual halt.

In public and in private meetings, both Democrats and Republicans said big changes are needed, presaging a difficult road ahead for the measure.

The legislation the administration is promoting would allow the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies’ 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 national economy that is already sputtering.

Democrats were determined to wrest concessions from the administration on domestic spending and middle-class economic aid. And they said Republicans had to share in the politically tricky task of pushing through a financial bailout six weeks before the elections at a time when millions of everyday Americans are economically strapped.

AP Jobs, spending data hint at recovery In a hopeful sign for the economy, the number of newly laid-off workers filing claims for unemployment benefits fell below 500,000 last week for the first time since January. New-home sales rise to highest level in a year Consumers log stronger-than-expected rebound Durable goods orders fall unexpectedly Recovery's pace slower than first thought

“It’s their problem. It’s their bill. And they’re going to have to figure out if they can support it,” House Speaker Nancy Pelosi, D-Calif., said of Republicans.

“Nobody wants to have to do this,” agreed Rep. John Boehner of Ohio, the Republican leader. He said he was hopeful of a quick agreement, despite withering criticism from conservative GOP lawmakers who recoiled at the prospect of federal intervention.

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

Both parties’ presidential candidates also insisted on alterations in the administration’s drastic prescription.

Democrat Barack Obama said any plan to rescue Wall Street from its financial woes must ensure that taxpayers are reimbursed and corporate executives are not further enriched for mismanagement. Republican John McCain, too, said the legislation must prevent executives from winning large taxpayer-funded bonuses, and he also said no earmarked spending could be included.

Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.

“Clipping executive compensation is easy right now — everybody wants it,” said Rep. Jack Kingston, R-Ga.

Democrats also were pushing proposals to let the government take some type of stake in the companies that it helps. The administration has balked at that, fearing it would discourage financial companies from getting the help they need through the bailout, thereby blunting the plan’s effectiveness.

Democrats also want to let judges rewrite mortgages to lower bankrupt homeowners’ monthly payments, another demand the administration is resisting.

Both Sens. Chris Dodd, D-Conn., chairman of the Banking Committee, and the panel’s top-ranking Republican, Richard Shelby of Alabama, said significant changes are needed before the rescue plan can be passed. “We have got to look at some alternatives,” Shelby said.

Getting the action right is key, Dodd said: “There is no second act to this.” He later spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters.

Bernanke’s remarks about the risk of recession came in response to a question from Dodd, 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.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Old fridge? ‘Cash for Appliances’ looms Stocks rise after slew of economic reports Oil falls to $76 on Dubai’s money troubles Jobs, spending data hint at recovery New-home sales rise to highest level in a year Consumers log stronger-than-expected rebound Durable goods orders fall unexpectedly Deere’s profit falls after drop in sales Tiffany raises forecasts for rest of the year Recovery's pace slower than first thought Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: