RAY SUAREZ: Amid signs of deepened economic distress, President Bush and the nation’s top economic policymakers fanned out across Washington, seeking to reassure roiling markets, skittish investors, and a worried public.
At the White House…
GEORGE W. BUSH, President of the United States: I’m not an economist, but I do believe that we’re growing.
RAY SUAREZ: … the president told reporters he was confident the economic outlook was sound. He was questioned at length on the economy.
GEORGE W. BUSH: First, let me talk about Fannie Mae and Freddie Mac. A lot of people in the country probably don’t understand how important they are to the mortgage markets. And it’s really important for people to have confidence in the mortgage markets and that there be stability in the mortgage markets.
And that’s why Secretary Paulson announced the plan this weekend, which says that he needs authorities from the Congress to come up with a line of credit for these institutions, if needed, and that he ought to have the authority to invest capital, if needed.
And so the purpose was to send a clear signal that, one, we understand how important these institutions are to the mortgage markets, and, two, to kind of calm nerves.
Now, if you’re a commercial bank in America and you have a deposit in a commercial bank in America, your deposit is insured by the federal government up to $100,000.
My hope is that people take a deep breath and realize that their deposits are protected by our government. So these two different instances, the mortgage markets on the one hand, banking on the other.
RAY SUAREZ: The president urged quick action from Congress on the housing and energy bills and reiterated his faith in the American economy.
GEORGE W. BUSH: And I can remember this press conference here where people yelling, “Recession this, recession that,” as if you’re economists. And I’m an optimist. You know, I believe there’s a lot of positive things for our economy.
Fed Chair forecasts hardships
RAY SUAREZ: On Capitol Hill, the chairman of the Federal Reserve struck a very different tone from Mr. Bush. Ben Bernanke took the Senate Banking Committee through a long list of worrying economic data and forecast hardships into next year.
BEN BERNANKE, Federal Reserve Chairman: The effects of the housing contraction and the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation.
Moreover, the currently high level of inflation if sustained might lead the public to revise up its expectations for longer term inflation. If that were to occur and those revised expectations were to become embedded in the domestic wage and price-setting process, we could see an unwelcome rise in actual inflation over the longer term.
RAY SUAREZ: Committee Chairman Christopher Dodd of Connecticut asked if the steady flow of bad economic news calls for a policy prescription.
SEN. CHRIS DODD (D), Connecticut: I wonder if you might just share with us here your views as to what ideas, as a menu of ideas, not necessarily embracing one or the other.
BEN BERNANKE: The central issue in the economic situation right now is the housing market. It's the continued uncertain certainty about house prices and housing activity which is creating financial stress, is affecting consumer wealth and consumer expectations, and is causing stress we're seeing in the economy. So my suggestion would be in the near term to focus on issues related to housing.
Banking sector woes
RAY SUAREZ: Ranking Republican Richard Shelby of Alabama asked if the country's banking system was in danger in light of the failure of the California thrift IndyMac and the problems facing Freddie Mac and Fannie Mae.
SEN. RICHARD SHELBY (R), Alabama: ... overall looking at our banking system, could you say today, here in the Senate, that you believe, as chairman of the Federal Reserve, that our banking system is stable and capitally strong?
BEN BERNANKE: Our banking system is well-capitalized. It came in with strong capital. We are watching the situation very carefully.
My concerns have turned more -- have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing, because in many cases banks are de-leveraging, or shrinking, or reluctant to raise the extra capital needed to take advantage of business opportunities, so that's more my concern than of solvency concerns.
RAY SUAREZ: Democrat Bob Casey of Pennsylvania brought the discussion down from macroeconomics to America's kitchen table.
SEN. BOB CASEY (D), Pennsylvania: How do we deal with this question of what is a recession and what isn't? And do we need some new definitions and some new terminology to better define what's happening to real families and real people?
BEN BERNANKE: I agree with you entirely that, whether it's a technical recession or not, that the combination of declining wealth, a weak job market, rising food and energy prices, foreclosures, tight credit, all those things are putting tremendous pressure on families and explains why consumer sentiment is very low. People are very worried.
So I certainly would never make the claim that, even if we were not in a technical recession, that it was not a serious situation.
Reasons to save Frannie, Freddie
RAY SUAREZ: Secretary of the Treasury Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox joined Bernanke before the committee. Paulson said the proposal to shore up Freddie Mac and Fannie Mae was intended as a last resort.
Richard Shelby of Alabama asked what might trigger the plan to prop up these government-supported entities, or GSEs.
SEN. RICHARD SHELBY: Mr. Secretary, what's the trigger -- at what point, in other words, would treasury exercise this new authority?
HENRY PAULSON, U.S. Treasury Secretary: The market is saying they've got concerns. And so we -- one way of reassuring the market and being ready to respond is to say that -- and, again, with the objective of market confidence and having the GSEs play that role which is so important in our housing market right now.
RAY SUAREZ: Under questioning from Delaware Democrat Tom Carper, Secretary Paulson later made clear this step was vital to both the mortgage markets and the wider economy.
HENRY PAULSON: The overriding issue here is the confidence in our capital markets more broadly, our financial system more broadly, the stability of our financial system more broadly, and the fact that the GSEs -- really, right now, this market is the only really working secondary market in housing finance in our country today.
RAY SUAREZ: The secretary assured lawmakers any moves to save Fannie Mae and Freddie Mac would not put the country's taxpayers at undue risk.