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More Bailouts for the Financial Industry on the Horizon

Published 03/04/09 Dustin Ensinger - Print Article
E-mail - editor@economyincisis.org

Federal Reserve Chairman Ben Bernanke testified in front of the Senate Banking Committee on Tuesday, defending President Obama’s massive budget despite an already enormous deficit. He also warned lawmakers that more bailouts for the financial industry are likely and expressed disillusionment over the business practices of American International Group.

Bernanke told lawmakers that the current economic crisis requires bold action and increased deficits are a necessary evil at this moment in history. Despite a debt of over $11 trillion, Bernanke said fiscal responsibility was a secondary concern right now.

“All else equal, this is a development that all of us would have preferred to avoid,” Bernanke said. “But our economy and financial markets face extraordinary challenges, and a failure by policy makers to address these challenges in a timely way would likely be more costly in the end.”

Obama’s proposed budget of $3.55 trillion for the fiscal year beginning Oct. 1 set aside $750 billion in aid for the ailing financial industry that Bernanke told lawmakers would likely need to be tapped soon.

The federal government has already sunk billions of dollars into the financial industry, taking stakes in financial firms, providing liquidity and effectively nationalizing others. The most recent recipient of corporate welfare, AIG, which has been to the government trough three times for a grand total of over $180 billion, was scolded by the normally reserved Bernanke during the hearing.

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one,” he said of the federal government being forced to bailout the insurance giant.

He expressed his anger by further stating that the company was run essentially like a “hedge fund, basically, that was attached to a large and stable insurance company.”

He, however, reiterated that the company was simply too big to fail. Bailing out AIG, was another necessary evil on the road to financial recovery, he said, pointing out that the company’s failure would be a catastrophic shock to the worldwide financial industry.

"We really had no choice," Bernanke said. "Bankruptcy is just not a good option."

Some lawmakers were not satisfied with Chairman Bernanke’s answers, claiming he was leaving the door open for more bailouts and imploring him to explain to the American people why these drastic measures that could prove very costly to the taxpayer are necessary.

"They ought to ... have some kind of consequence," Sen. Ron Wyden (D-OR) said. "The American people are in the dark on this issue, and I think it's time for some sunlight. I think that the public really wants to know why are these people so important."

Indeed. The public should also be asking where will the bailouts end? At what point does the government finally say no? Why were some of these financial institutions allowed to become “too big to fail?” What is being done to ensure that taxpayers are not fleeced for more of their hard earned money in the future? These are the questions that need to be asked and answered, but are being largely ignored.

Source Bloomberg News:

Federal Reserve Chairman Ben S. Bernanke said policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other aggressive measures even at the cost of soaring fiscal deficits.

“Without a reasonable degree of financial stability, a sustainable recovery will not occur,” the Fed chairman said today in testimony prepared for the Senate Budget Committee. “Although progress has been made on the financial front since last fall, more needs to be done.”

Bernanke’s comments suggest he sees a role for bigger federal outlays as the Obama administration seeks congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. President Barack Obama has already signed into a law a $787 billion economic stimulus package of tax cuts and government spending.

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