Paulson and Bernanke speak in defense of bailout actions

The nation’s top financial officials on Tuesday defended their actions in the financial crisis, and warned that the $700 billion rescue package shouldn’t be used for broader economic stimulus plans.

Treasury Secretary Henry Paulson said the bailout package is not a “panacea” for the country’s economic ills and underlined his opposition to Democrats’ efforts in the lame-duck session of Congress to use some of the money to support the Big Three automakers.

{mosads}“The rescue package was not intended to be an economic stimulus,” Paulson said.

Paulson testified alongside Federal Reserve Bank chairman Ben Bernanke and Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation. Bernanke and Paulson both were optimistic that their efforts had helped financial markets and that had they not acted, the situation would be worse.

Their actions, Bernanke said, “appeared to stabilize the situation and to improve investor confidence in financial markets.”

Their testimony came as Democrats have increasingly grilled the Bush administration for not using money from the bailout package, the Troubled Asset Recovery Program (TARP), for the original aim: purchasing illiquid assets.

Last week, Paulson said he would not be purchasing troubled assets with the money. Treasury has so far allocated about $290 billion of the $700 billion bailout money to inject equity into banks and to shore up ailing insurance giant AIG with $40 billion. Paulson said that he wanted to maintain the balance of the money for the next administration unless markets force his hand to act before President-elect Barack Obama takes office 10 weeks.

Rep. Gary Ackerman (D-N.Y.) lambasted Paulson for the switch in plans. “You seem to be flying a $700 billion plane by the seat of your pants,” he said.

Paulson defended the government’s actions to switch plans with the federal bailout money, and said that federal officials sought broad authority from Congress in October.

“We came and said there is a real crisis and we got the authorities we needed and we went to the heart of the problem — the financial system and capital,” Paulson testified. “We used a system that would work more effectively.”

The combined federal efforts have been under way for months, with the Federal Reserve setting up a $2 trillion balance sheet with special credit facilities to prop up lending, and Treasury accessing TARP funds over the last month. Both officials said the response was still in the early stages.

“Overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October,” Bernanke said.

Paulson testified that he is pursuing additional programs to support lending, including a program to lend private capital that has yet to be unveiled. Meanwhile, groups such as community banks are lobbying for access to TARP funds.