US Economy: Bernanke Describes Economic Woes at Congressional Hearing

The Federal Reserve chairman Ben Bernanke warned of "numerous difficulties" facing the US economy during a feisty congressional hearing at which senators expressed alarm about writing blank checks to bail out mortgage financiers.

In comments which failed to cheer a cautious mood on Wall Street today, the central bank boss rattled off a list of factors behind "sluggish" growth including falling house prices, a softening labor market, credit losses at financial institutions and flat capital investment by businesses.

"The economy has continued to expand, but at a subdued pace," said Bernanke, adding that soaring prices for fuel and other commodities meant inflation "seems likely to move temporarily higher in the near term".

Although Bernanke avoided using the word "recession", his remarks went down poorly on the stockmarket where the Dow Jones Industrial Average spent the morning in negative territory, slipping five points to 11,050 by lunchtime.

Appearing before the Senate banking committee, Bernanke faced a tough examination over the administration's handling of recent financial flare-ups alongside the US treasury secretary, Henry Paulson and the chairman of the securities and exchange commission, Christopher Cox.

A Democratic senator, Robert Menendez, pointed out that regulators had been forced to cobble together hastily arranged weekend rescue packages both for Bear Stearns and for the two troubled mortgage finance firms Fannie Mae and Freddie Mac.

"We seem to be constantly behind the curve instead of ahead, reactive instead of proactive," said Menendez.

"I'm concerned that what we have here is the equivalent of last-minute cramming as a style of regulatory policy."

Others asked why the treasury was asking for authority to extend an unlimited amount of financing to Fannie and Freddie, rather than putting a cap on the potential cost to taxpayers.

"The treasury secretary is asking for a blank check to buy as much Fannie and Freddie debt as he wants for this unprecedented intervention in our free markets," said Jim Bunning, a Republican senator.

The bail-out, a response to an evaporation of confidence which sent shares in Fannie and Freddie into free fall last week, was defended by Paulson as beneficial to anybody owning a home or seeking finance to buy one.

Paulson said the two government-sponsored finance firms represent "the only functioning secondary mortgage market" making them crucial in supporting home loans to consumers.

Any limit on support, said Paulson, would be "self-defeating" because it would erode confidence.

Responding to criticism about oversight, the SEC's chairman said regulators had more than four dozen cases under way against wrongdoing by subprime mortgage lenders, banks, insurers and credit rating agencies.

Cox revealed that his authority was putting in place emergency restrictions to reduce traders' ability to depress the shares of Fannie and Freddie through short selling.