JIM LEHRER: The chairman of the Federal Reserve talks recession and defense. Jeffrey Brown has our report.
JEFFREY BROWN: Federal Reserve Chairman Ben Bernanke returned to Capitol Hill today to face more questions about the faltering economy, this time with a more pessimistic assessment than in the past.
Senator Chuck Schumer of New York chaired the Joint Economic Committee's hearing.
SEN. CHUCK SCHUMER (D), New York: Am I correct in understanding that you now believe a recession is possible, certainly more likely than it was a few months ago?
BEN BERNANKE, Federal Reserve chairman: A recession is possible, but a recession is a technical term defined by the National Bureau of Economic Research, depending on data which will be available quite a while from now.
So I'm not yet ready to say whether or not the U.S. economy will face such a situation. However, it's clearly a period of very slow growth, extending back to the fourth quarter of last year, and we are trying to set our policies appropriately for that situation.
SEN. CHUCK SCHUMER: Do you believe the economy's contracting right now?
BEN BERNANKE: Our estimates are that we're slightly growing at the moment, but we think that there's a chance that, for the first half as a whole, there might be a slight contraction.
JEFFREY BROWN: This was also Bernanke's first appearance since the Fed's recent rescue of the investment house Bear Stearns, and the hearing's focus quickly turned to that.
Bear Stearns had invested heavily in risky mortgage-backed securities. The Fed helped facilitate the sale of the troubled investment house to JPMorgan Chase, with guarantees that, if those securities don't recover, the Fed will bear the cost, up to $29 billion.
Bernanke explained why the Fed made the unprecedented move.
BEN BERNANKE: Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.
JEFFREY BROWN: The Fed chairman said he was "reasonably confident" taxpayers would recoup the $29 billion. Republican Sen. Sam Brownback of Kansas asked whether it was realistic this would be a one-time deal.
SEN. SAM BROWNBACK (R), Kansas: Is there another shoe to fall here sometime soon? Or is it that we're -- OK, we think this was an unusual situation with Bear Stearns, and we're not seeing the same sort of factors lining up with any of these other big financial institutions?
BEN BERNANKE: I don't see those same factors lining up. The fact that we're now lending to the dealers I think will be of some help on the liquidity side. But obviously, you know, the future is never certain, and we're going to have to be vigilant as we go forward.
JEFFREY BROWN: Senators also questioned whether the Fed was helping Wall Street while ignoring homeowners in trouble.
SEN. CHUCK SCHUMER: One of the things that bothers many of us is not the necessity of government intervention at Bear, but what about government intervention in the housing market?
BEN BERNANKE: I think there's sort of a false dichotomy here. We did not bail out Bear Stearns. Bear Stearns' shareholders took a very significant loss.
We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which, in turn, is critical for the health of the economy. What we did -- always in my mind was what, was the best thing for the American public?
And that's why we took that action, and I believe that was the benefit of that action, not to help individual Wall Street people.
JEFFREY BROWN: Bernanke was also asked about a new Bush administration plan to revamp the nation's financial regulatory system. It would give the Fed more power to oversee the market and financial institutions but could also reduce the Fed's oversight of traditional banks.
BEN BERNANKE: We would want to be sure that, if we were given that very important responsibility, that we had adequate powers, authorities, expertise, and so on, to make sure that we could do it effectively.
JEFFREY BROWN: The Fed chairman will testify again tomorrow, this time alongside Treasury Secretary Paulson, SEC Commissioner Christopher Cox, and banking officials. The Bear Stearns deal will be the subject of that hearing tomorrow in front of the Senate Banking Committee.