The Fed chief faced tough questions about the government’s decision to add $30 billion to its rescue package for AIG. The latest plan, announced Monday, marked the government’s fourth effort to stabilize AIG.
“We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice,” Bernanke told the Senate budget committee.
But Bernanke also offered criticism of AIG, expressing his anger over the state of company’s holdings. AIG provides insurance protection for a multitude of financial programs and institutions and has buckled under the weight of credit default swaps tied to mortgage-back securities and other investments.
The Fed and the Treasury Department have warned of a “systemic risk” to financial markets if the company was allowed to collapse.
“We have been doing what we can to break the company up, to get it into a saleable position and to try to defang it,” he said. “If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one (other than) AIG,” Bernanke added, accusing the company of exploiting a “huge gap” in the regulatory system, news agencies report.
Bernanke also offered a grim view of U.S. economic prospects, saying the labor market may have worsened in recent weeks.
“We are better off moving aggressively today to solve our economic problems,” Bernanke said. “The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period.”
The government will release February unemployment data on Friday and many economists are predicting the unemployment rate rose to 7.9 percent last month while employers cut nearly 650,000 jobs, according to the Associated Press.
Several Obama administration economic officials were testifying on Capitol Hill Tuesday in support of a new budget plan — including Treasury Secretary Timothy Geithner at the House Ways and Means Committee and Budget Director Peter Orszag at the House Budget Committee.
Geithner told lawmakers at the start of his testimony that the administration has inherited “the worst fiscal situation in American history.”
Meanwhile, the Federal Reserve on Tuesday rolled out a new program, dubbed the Term Asset-Backed Securities Loan Facility, aimed at increasing the availability of credit to consumers and small businesses.
The Fed will lend up to $200 billion to boost consumer lending – for autos, education, credit cards and other consumer debt. The money will be used to provide financing to investors to buy up the debt.
Those who wish to apply for the funds, largely companies and investors that pledge eligible collateral to back the loan, must request the new government loans by March 17. The Fed will provide the three-year loans on March 25, the AP reported.