Ben Bernanke, the US Federal Reserve chairman, told a congressional committee yesterday that credit markets are stabilising but remain under pressure while Treasury Secretary Henry Paulson said he opposes tapping a $700bn taxpayer-funded scheme to help struggling US carmakers.
Ben Bernanke, the US Federal Reserve chairman, told a congressional committee yesterday that credit markets are stabilising but remain under pressure while Treasury Secretary Henry Paulson said he opposes tapping a $700bn taxpayer-funded scheme to help struggling US carmakers.
Both defended their management of the bailout programme, just one week after the Bush administration abandoned the original strategy behind the rescue.
Although having a US vehicle company suach as General Motors fail during such a fragile time for the economy would not be a "good thing," Paulson told the House of Representatives Financial Services Committee that he remains opposed to diverting $25bn of the bailout money to help the industry. The panel's chairman, Barney Frank, and other Democrats want to offer financial assistance to the beleaguered car builders because they may soon run out of cash, leaving millions of workers unemployed.
"I don't see this as the purpose" of the bailout programme, which is intended to stabilise jittery financial markets and get lending flowing more freely again, which eventually should help revive the ailing economy, Paulson said.
He also said the United states has "turned a corner" in averting a financial collapse, but more work needs to be done to get things back to normal.
Paulson and Bernanke robustly defended they way they have handled the bailout scheme.
The Treasury Secretary explained that injecting billions into banks - and possibly other types of com- panies - to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilising the financial system than buying rotten assets from financial institutions, the centrepiece of the original plan.
Buying those toxic debts would have required a "massive commitment" of the bailout money, Paulson told the panel.
As economic and financial conditions quickly worsened, it became clear that the first installment of the money - $350bn - for that purpose "simply isn't enough firepower," he said.
Meanwhile, the Fed chief said credit markets, "while still quite strained, are improving", He told the panel that Treasury Department injections of capital into financial institutions would be critical for restoring confidence and promoting the return of credit markets to more normal functioning.
Bernanke appeared on a panel with Paulson and Federal Deposit Insurance Corporation chairman Sheila Bair to discuss government efforts to help the stalling US economy, which has been hit by a slump in the housing market and a credit crisis.
Credit conditions remain "far from normal," Ber-nanke said, citing elevated risk spreads and tighter bank lending standards through October.
On the economic front, further signs of diminishing inflation pressures in America and Britain reinforced market expectations that both the Federal Reserve and the Bank of England will cut interest rates again soon.
Consumer price inflation in Britain fell in October for the first time in 14 months largely because of cheaper oil prices, while in the United States, the Producer Price Index fell 2.8% in October, the biggest fall on records that go back more than 60 years.
"It is remarkable that in just a few months fears have switched from inflation to deflation, a testament to how suddenly the global econ-omy's expansion has turned into recession," said Nigel Gault, chief US economist at IHS Global Insight.
The surprising drop in UK inflation pushed down the yield on two-year gilts below 2% for the first time since records began 20 years ago.
European and US stocks rose but traders said the mood of investors remained fragile.
The UK's top share index ended 1.8% higher as strong gains on Wall Street and by oil heavyweights offset fresh falls from struggling banks amid more turmoil in the financial sector.
At the close, the FTSE-100 index was up 76.39 points at 4208.55, the day's peak.
Mainland European shares ended a choppy session higher, helped by gains in energy shares and a rally on Wall Street after reassuring results from Hewlett-Packard, but weak financials continued to worry.
Germany's DAX index ended at 4579.47 points, up 22.2 or 0.49%, while in France, the Paris Bourse's CAC-40 index closed at 3217.4 points, up 35.37 or 1.1%.
Wall Street stocks rose soon after the opening bell with the Dow Jones industrial average later closing 151.17 points up at 8424.75.
The Dow had closed lower in four of the past five sessions amid worries about how long a recession might be.
