Bernanke Says Failure to Pass Plan Threatens Economy (Update1)

By Scott Lanman and Simon Kennedy

Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke warned lawmakers that failure to pass a rescue plan to take over troubled assets from financial firms would pose a threat to markets and the economy.

``Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy,'' Bernanke said in testimony prepared for delivery today to the Senate Banking Committee. ``Global financial markets remain under extraordinary stress.''

Bernanke and Treasury Secretary Henry Paulson are pushing Congress to quickly approve a $700 billion plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay, while some Republicans question the plan's reach and size.

``At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,'' Bernanke said.

Bernanke endorsed the biggest federal intrusion into markets since the Great Depression after failing to stem the credit crisis by cutting the benchmark interest rate at the most aggressive pace in two decades. He has also opened up lending to securities firms and expanded loans to commercial banks.

Regulatory Overhaul

Along with the government bailout, Bernanke supports a regulatory overhaul for a U.S. financial industry upended by $523 billion in losses from the collapse of mortgage credit.

The Fed approved this week bids by Goldman Sachs Group Inc. and Morgan Stanley to become commercial banks, ending an investment banking era. A week earlier, Lehman Brothers Holdings Inc. filed for bankruptcy.

Merrill Lynch & Co. agreed to a merger with Bank of America Corp. earlier this month, while American International Group Inc. neared collapse before the Fed engineered a federal takeover by extending the world's biggest insurer an $85 billion loan. The week before, Treasury seized Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans.

Investor concern that the Paulson rescue would inflate the U.S. budget deficit pushed the dollar down 2.3 percent yesterday in the biggest decline since creation of the euro in 1999. U.S. stocks and bonds also fell.

Faltering Expansion

U.S. economic growth may slow to 1.7 percent this year and 1.5 percent next year, the slowest since the last recession in 2001 and its aftermath in 2002, according to the median of 80 economist forecasts compiled by Bloomberg.

The flagging economy and tumbling commodity prices, including a 17 percent decline in the price of crude oil since July 11, have eased pressure on Bernanke and other policy makers to raise the benchmark interest rate from 2 percent.

Government figures showed last week that consumer prices fell 0.1 percent in August, after jumping 0.8 percent the prior month, as fuel prices declined from record levels. Prices were up 5.4 percent from a year before.

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net

Last Updated: September 23, 2008 08:00 EDT