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Bernanke: Bear Stearns collapse threatened economy

At a congressional hearing Thursday, the Fed chairman defended the rescue of the investment bank.

By Staff writer of The Christian Science Monitor / April 4, 2008


The US government saved Bear Stearns from bankruptcy because a collapse of the investment bank would have reverberated throughout the economy – increasing the risk of lower incomes, lower home values, and unemployment for ordinary Americans.

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That was the explanation offered by Federal Reserve Board chairman Ben S. Bernanke and a range of US officials at an April 3 Senate hearing on the decision to help broker the sale of Bear Stearns to JPMorgan Chase in March.

Washington's task now is to strengthen its oversight of the nation's financial system so that the weaknesses of a single firm does not again threaten the whole economy, officials said.

"We need to begin to design a comprehensive set of reforms for the financial system," said Timothy F. Geithner, president of the Federal Reserve Bank of New York.

Bear Stearns' brush with bankruptcy remains one of the most dramatic events in the recent turmoil in financial markets. The nation's fifth-largest investment bank was done in by the credit crunch that has also caused mortgage foreclosures and tight money for businesses throughout the US – indeed, throughout the world.

On Capitol Hill, some legislators have questioned the propriety of the actions of the Federal Reserve and Treasury Department in facilitating the deal between Bear Stearns and JPMorgan. In particular, some Democrats want to know why the Fed agreed to take $30 billion of risky Bear assets off Morgan's hands – and whether a big investment bank was getting the kind of bailout that so far has been denied homeowners facing default on their mortgages.

"Was this a justified rescue to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout for a Wall Street firm while people on Main Street struggle to pay their mortgages?" asked Sen. Christopher Dodd (D) of Connecticut, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, in his opening statement at the hearing.