Bernanke sounds warning

The Baltimore Sun

WASHINGTON - A sense of economic gloom gripped Washington yesterday as President Bush urged Americans not to lose faith, Ben S. Bernanke, the Federal Reserve chairman, offered a mostly bleak assessment of the many difficulties ahead for the economy, and the administration's latest effort to help the housing sector faced tough questioning in Congress.

Despite widespread concern about losses at Fannie Mae and Freddie Mac, the two giant housing finance companies, the Bush administration's call for quick passage of legislation to authorize the use of government funds to save them ran into heavy fire, especially among some Republicans concerned about taxpayer liability.

The opposition threatened to slow down the rescue plan, especially if lawmakers insist on making major changes in the package, which would allow the Bush administration to use the U.S. Treasury to help Fannie and Freddie by lending them money and buying their stock.

The latest trouble in financial markets, rising energy prices and spreading joblessness were also sowing new discord among lawmakers, with Democrats calling for, and Republicans resisting, a new round of spending programs and tax cuts to stimulate the economy.

A day after reports of losses by regional banks that prompted some depositors to pull their money out, Bush held an unscheduled news conference at which he reminded Americans that their bank deposits are insured up to $100,000.

"My hope is that people take a deep breath and realize that their deposits are protected by our government," the president said.

Bush added that economic growth "was not the growth we'd like" but that he is confident the country will overcome "a time of uncertainty." The nation's troubled financial system is "basically sound," he said.

The Dow Jones industrial average closed down almost 93 points after a roller-coaster session, with the shares of the two mortgage finance companies also continuing their steep slide. Fannie Mae fell 27 percent and Freddie Mac 26 percent.

Bernanke, testifying before the Senate Banking Committee, avoided saying "recession" but presented a generally gloomy picture, saying that consumer spending and exports were keeping growth "at a sluggish pace," while the housing sector "continues to weaken."

"The economy has continued to expand, but at a subdued pace," Bernanke said at another point. In one rare note of optimism, he revised upward the Fed's growth estimate for the year and added that consumer spending has exceeded expectations.

The Fed chief spent the early morning testifying alone, as part of his twice-a-year appearances before Congress, then joined Treasury Secretary Henry M. Paulson Jr. and SEC Chairman Christopher Cox. Sitting with them, he endorsed Paulson's plan, unveiled Sunday, to seek legislation to give the federal government temporary power to help Fannie and Freddie.

Before Bernanke delivered his economic assessment to Congress, the Labor Department reported that wholesale prices jumped 1.8 percent in June. That left inflation rising over the past year at the fastest pace in more than a quarter-century.

Bernanke offered no timetable for improved economic performance, saying that although the risks to the overall economy are still "skewed to the downside," inflation "seems likely to move temporarily higher in the near term." The Fed, he said, needs to guard against higher prices spreading through the economy.

That mixed warning about rising costs and a downturn reinforced the message of last month's meeting of the Federal Open Markets Committee, the central bank's policymaking body, that it would not cut interest rates further and that higher rates might be necessary to combat inflation later in the year.

Despite lines snaking around branches of failed IndyMac Bank and a report from the chairwoman of the Federal Deposit Insurance Corp. that more banks are expected to run into trouble, Bernanke said he does not think there is a significant danger to the consumer and commercial banking sector, most of which he said remains profitable.

But concerns about the consumer banking system succumbing to the ills of the credit crisis rattled official Washington, as Bush's citation of the federal government's insurance of bank deposits made clear.

"The bottom line is this: We're going through a tough time," Bush said. "But our economy's continued growing, consumers are spending, businesses are investing, exports continue increasing, and American productivity remains strong."

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