[DEBATE] : Bernanke defends AIG rescue

[Riaz Tayob]

[But who is going to save the world from the (in part) AIG sponsored
liberalisation at the WTO and FTAs... ]

Bernanke defends AIG rescue
MARK FELSENTHAL | WASHINGTON, UNITED STATES - Mar 04 2009 07:19


United States Federal Reserve chairperson Ben Bernanke on Tuesday
defended the government's latest bailout of embattled insurer AIG,
telling irate lawmakers that he was also angry, but that the failure
to act could have triggered an economic disaster.

Bernanke, in testimony to the Senate Budget Committee, gave a grim
view of US economic prospects, saying labour market conditions may
have worsened in recent weeks. His comments helped drive the stock
market briefly lower.

Pressed by the Senate committee to justify the latest in an expanding
series of bailouts for American International Group (AIG), Bernanke
said there was no alternative, even though the company had been
irresponsible.

"We know that failure of major financial firms in a financial crisis
can be disastrous for the economy. We really had no choice," he told
the panel.

The US government threw a fresh $30-billion lifeline to AIG on Monday,
as part of a restructured bailout that had earlier swelled to about
$150-billion.

AIG, which reported a record $61,7-billion quarterly loss on Monday,
has been slammed by losses on its credit default swaps that guarantee
mortgage-linked securities.

Lawmakers told the Fed chairperson that public patience has worn thin
over the generous support for the foundering insurer even as smaller
firms and households are taking heavy hits from the slumping economy.

"Right now, small businesses across the country, who played by the
rules, paid their bills on time, can't get a line of credit, while AIG
seems to have an open spigot for taxpayer money," said Senator Ron
Wyden, a Democrat.

Bernanke said AIG's extensive relationships with banks around the
globe presented the risk of "contagion" should the company fail, and
said authorities were working hard to try to neutralise dangerous
positions.

CONTINUES BELOW


"We have been doing what we can to break the company up, to get it
into a saleable position and to try to defang it," he said. "If
there's a single episode in this entire 18 months that has made me
more angry, I can't think of one [other than] AIG," Bernanke added,
equating the company's financial services division with an unregulated
hedge fund.

Wider budget gap a necessary evil
Bernanke told the committee that restoring stability to the battered
financial sector was a prerequisite to a recovery from the deep US
recession, and said a surge in US government debt was unavoidable.

"We are better off moving aggressively today to solve our economic
problems," he said. "The alternative could be a prolonged episode of
economic stagnation that would not only contribute to further
deterioration in the fiscal situation, but would also imply lower
output, employment and incomes for an extended period."

In addition to the likelihood of a worsening jobs market, Bernanke
said many businesses are burdened with excess inventories and are
likely to cut production further in the months ahead.

The collapse of the US housing market bubble has set off a chain
reaction, tipping economies around the world into recession, and
heaping fiscal strain on governments.

A budget proposal released by the White House last week envisioned a
record budget deficit of $1,8-trillion this year, and a rise in the
ratio of debt to gross domestic product to about 60% from 40% -- the
highest level since the early 1950s.

"All else equal, this is a development that all of us would have
preferred to avoid," Bernanke said.

He said a decision on whether the government needs to increase the
size of a $700-billion bank rescue package would depend on bank
"stress tests" being conducted by regulators and the direction of the
economy. -- Reuters

http://www.mg.co.za/article/2009-03-04-bernanke-defends-aig-rescue