Fed chief warns: Approve bailout or risk worse, accelerated recession

Wary legislators want to hear alternatives to Bush’s bailout plan.

WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday that they risk a recession with higher unemployment and increased home foreclosures unless they act on the Bush administration’s $700 billion plan to bail out the financial industry.

Despite the warning, influential lawmakers in both parties demanded changes in the White House-backed proposal, and conservative Republicans recoiled at the prospect of federal intervention into private capital markets.

Six weeks before the election, both major party presidential contenders also insisted on alterations in the administration’s prescription for the worst financial crisis in decades.

Bernanke’s remarks about the risk of recession came in response to a question from Sen. Chris Dodd, D-Conn., who seemed eager to hear a strong rationale for lawmakers to act swiftly on the administration’s unprecedented request.

“The financial markets are in quite fragile condition, and I think absent a plan, they will get worse,” Bernanke said.

Ominously, he added, “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”

GDP is a measure of growth, and a decline correlates with a recession.

Dodd later spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters after presiding over a lengthy Senate Banking Committee hearing at which Bernanke and Treasury Secretary Henry Paulson urged swift action by Congress.

Sen. Richard Shelby of Alabama, the panel’s senior Republican, added, “We have got to look at some alternatives” to the administration’s plan.

The legislation that the administration is seeking would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions.

Getting those debts off their books should bolster the institutions’ balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it could help lift a major weight off the sputtering national economy.

The White House and key lawmakers have been in negotiations since the weekend on terms of the legislation. It was not clear what impact the new congressional complaints would have on the discussions.