(CBS/ AP) Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday they risk a recession with higher unemployment and increased home foreclosures unless they act on the Bush administration's $700 billion plan to bail out the financial industry.
Despite the warning, influential lawmakers in both parties demanded changes in the White House-backed proposal, and conservative Republicans recoiled at the prospect of federal intervention into private capital markets.
Sen. Chris Dodd, a Connecticut Democrat, said on Tuesday, "What they have sent us is not acceptable."
Sen. Richard Shelby, an Alabama Republican, said, "We have got to look at some alternatives."
Six weeks before the elections, both major party presidential contenders also insisted on alterations in the administration's prescription for the worst financial crisis in decades.
Bernanke's remarks about the risk of recession came in response to a question from Dodd, who seemed eager to hear a strong rationale for lawmakers to act swiftly on the administration's unprecedented request.
"The financial markets are in quite fragile condition and I think absent a plan they will get worse," Bernanke said.
Ominously, he added, "I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way."
GDP is a measure of growth, and a decline correlates with a recession.
But even before Paulson and Bernanke could speak, lawmakers expressed their unhappiness.
"We all recognize the gravity of the situation," said Dodd, the committee's chairman. He said a combination of "private greed and public regulatory neglect" had produced an "economic maelstrom."
Sen. Shelby of Alabama, the panel's senior Republican, was even blunter. "I have long opposed government bailouts for individuals and corporate American alike," he said. Seated a few feet away from Paulson and Ben Bernanke, the chairman of the Federal Reserve, he added, "We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis."
Dodd and other key Democrats have been in private negotiations with the administration since the weekend on legislation designed to allow the government to buy bad debts held by banks and other financial institutions. Key details remain unresolved, although the Democratic-controlled Congress is expected to vote in the next several days on a far-reaching measure.
The hearing unfolded as Vice President Dick Cheney and Jim Nussle, the Bush administration's budget director, met privately with House Republicans. Some members of the GOP rank and file have expressed concerns about the bailout proposal, either because they view it as an unwarranted government intrusion into the financial markets, or because the $700 billion price tag gives them pause.
"Just because God created the world in seven days doesn't mean we have to pass this bill in seven days," said Rep. Joe Barton, R-Texas.
Added Rep. Darrell Issa, R-Calif., "I am emphatically against it."
Despite the bipartisan unhappiness, the prospects for legislation seemed strong.
Differences remained, though, including a demand from many Democrats and some Republicans to strip executives at failing financial firms of lucrative "golden parachutes" on their way out the door.
The administration is balking at another key Democratic demand: allowing judges to rewrite bankrupt homeowners' mortgages so they could avoid foreclosure.
The administration's plan is designed to let the government buy bad mortgages and other troubled assets held by endangered banks and financial institutions. Getting those debts off their books should bolster their balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the sputtering economy.
So far this year, a dozen federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering.
President Bush was in New York, his speech before the United National General assembly crafted to offer assurances to world leaders that the U.S. government has its financial problem under control.
He said he is confident that Congress will pass the necessary legislation to deal with the problem and said he has assured other leaders that the financial package is "a robust plan to deal with serious problems." He said there are ideas about how to change it, but that there is a desire to get a package done quickly.
The U.S. has taken extraordinary measures in recent weeks to prevent a financial calamity, which would have devastating implications for the broader economy. It has, among other things, taken control of mortgage giants Fannie Mae and Freddie Mac, provided an $85 billion emergency loan to insurance colossus American International Group Inc. and temporarily banned short selling of hundreds of financial stocks.
However, the proposed bailout did little to allay fears on Wall Street Monday as stocks fell sharply, taking the Dow Jones industrials down more than 370 points, while investors sought safety in hard assets such as gold and oil, which at one point shot up more than $25 a barrel.
Sen. Hillary Rodham Clinton said Tuesday she worries that taxpayers could be left "holding the bag" with plans for a $700 billion government program to stabilize the country's distressed financial markets.
On CBS's The Early Show she said she agrees that the situation is critical and that something must be done quickly. She said, "the house is on fire and we've got to call the fire department and put the fire out." But Clinton also said that Congress should not "give the Treasury a blank check" to straighten out the problem.
Also Tuesday, FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature" of any government bailout plan.
Under the proposal, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.
Wall Street has been dramatically reshaped amid all the fallout. The Fed agreed to let Goldman Sachs and Morgan Stanley - the country's last two investment banks - become bank holding companies so that they can take deposits, like a commercial bank, in a bid to survive. Merrill Lynch agreed to be bought by Bank of America. Lehman Brothers sought bankruptcy protection, and Bear Stearns was taken over by JPMorgan Chase.
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