US Federal Reserve chairman Ben Bernanke said today that credit markets, while stabilising, remain under serious strain and government capital injections into banks are needed to help restore normal lending.
"There are some signs that credit markets, while still quite strained, are improving," he said in testimony prepared for delivery to the House of Representatives Financial Services Committee.
Mr Bernanke appeared on a panel with treasury secretary Henry Paulson and Federal Deposit Insurance Corp chairman Sheila Bair to discuss government efforts to help the US economy, which has been slammed by the collapse of housing markets and a credit crisis.
Lawmakers urged authorities to use funds from the $700 billion Troubled Assets Relief Program to assist homeowners facing foreclosure, an idea proposed by Bair but rejected by Paulson who has said the bailout package should be used for investments, not spending.
Without directly endorsing the FDIC plan, Mr Bernanke agreed with lawmakers at the hearing that the government could play a more active role in preventing foreclosures.
"I think a very strong point of the FDIC program is it's simple and it's run by the servicers rather than the government," he said in response to questions.
"In general ... this is a very promising approach," he said.
The Fed has offered financial institutions hundreds of billions of dollars worth of loans in an effort to prevent the financial system from collapsing as institutions shrink from taking risks in the wake of a surge of mortgage delinquencies.
Mr Bernanke said the financial crisis does not spell the end of the dollar's reign as dominant world currency, and has in fact strengthened the value of the US currency.
"The dollar remains the premier international currency," he said.
"We have seen a vivid appreciation in the dollar recently during the crisis precisely because there has been a lot of interest in the safe haven and liquidity in dollar markets and the Federal Reserve has been engaged in swap agreements to make sure there is enough dollar liquidity in other countries because the need for dollars is so strong," he said.
Mr Bernanke also said the Treasury's ability to take any actions that might be needed to prevent the failure of a systemically important financial institution would be an important part of restoring confidence and healing markets.
"The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical steps toward restarting flows of credit," he said.
Reuters