Although credit conditions in the U.S. remain under strain, there have been some signs of improvement in recent weeks, Federal Reserve Board chairman Ben S. Bernanke told members of Congress yesterday.
"Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market," he said at a hearing of the House Financial Services Committee. "Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks."
However, overall credit conditions are "far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October," Bernanke said. "There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks."
The committee met to discuss the Treasury Department's $700 billion Troubled Asset Relief Program with Bernanke, Treasury Secretary Henry Paulson, and Federal Deposit Insurance Corp. chairwoman Sheila Bair.
"Going forward, the ability of the Treasury to use the TARP to inject capital into financial institutions and to take other steps to stabilize the financial system - including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution - will be critical for restoring confidence and promoting the return of credit markets to more normal functioning," Bernanke said.
But the lawmakers criticized Paulson for the direction of the TARP program after he announced a dramatic change in strategy last week, saying the Treasury will now purchase equity stakes in financial entities rather than troubled assets.
One lawmaker after another objected to the apparent lack of any effort by the Treasury to use some of its vast resources under TARP to mitigate foreclosures, with the committee's chairman, Rep. Barney Frank, D-Mass., at one point tersely reading from legislation that he said "mandates" aggressive action from Treasury to assist homeowners.
Some of the strongest criticism came from New York Democrats, including Rep. Gary Ackerman, who called TARP "the second-largest bait-and-switch scheme that history has ever seen" - second to the invasion of Iraq - and Rep. Nydia Velazquez, who said her constituents can't figure out how the bailout package helps them.
"I hear your frustration," Paulson said. "More needs to be done."
The strongest call for foreclosure mitigation came from Bair, who said that if Treasury used just $24.4 billion of TARP funds, it could prevent 1.5 million mortgages from foreclosure.
"More aggressive intervention is needed if we are to curb the damage to our neighborhoods and the broader economy," she said.
