Bernanke outraged over AIG

Bernanke sobre la irresponsabilidad de AIG, los costos fiscales del rescate y la necesidad de no caer en un equilibrio suboptimo

By Alan Beattie in Washington and Alan Rappeport in New York

Published: March 3 2009 16:15

Ben Bernanke, chairman of the Federal Reserve, on Tuesday scolded American International Group, the troubled insurer that has needed multiple government rescues, for operating like a hedge fund and said that its bail-out made him “angry”.

The Fed chief said it was an unfortunate predicament that AIG had become so big that its failure would pose a systemic risk to the US and world economy. He estimated the costs of letting it fail in the trillions of dollars.

”The AIG situation is obviously very uncomfortable for me,” Mr Bernanke said Tuesday during a Senate Budget Committee hearing. ”We took those actions because we felt that first of all the failure of the world’s largest insurance company would be devastating to the stability of the world financial system.”

On Monday AIG confirmed it would give the US government a large stake in its two largest divisions as part of a $30bn-plus rescue package that could lead to a break-up of the 90-year-old insurer. The company lost nearly $100bn in 2008.

Mr Bernanke said that AIG made ”huge numbers of irresponsible bets” and that its investment vehicles lacked oversight. “This was a hedge fund, basically,” he said.

However the Fed chief offered a mild defense of US banks, claiming that they have not reached the same “zombie” status that Japan experienced in the 1990s when banks sustained bankrupt customers and were kept marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. ”I don’t think that any major US bank is currently a zombie institution,” Mr Bernanke said. ”They’re all lending. They’re all viable.”

At the hearing Mr Bernanke offered a grim list of recent economic data framing the dire state of the US economy. He said that swelling fiscal deficits are a necessary evil in the short term as the price of supporting economic growth. In his testimony Mr Bernanke said that while the predicted federal deficit of $1,750bn this year was unfortunate, the alternative would have been worse. “Of course, all else equal, this is a development that all of us would have preferred to avoid. But our economy and financial markets face extraordinary challenges, and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end.”

Mr Bernanke said: “We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment, and incomes for an extended period.”

But the Fed chairman added that policymakers must address the medium-term fiscal solvency of the US and withdraw the temporary parts of the fiscal stimulus as the economy recovered. “Congress will need to weigh the costs of running large budget deficits for a time against the possibility of a premature removal of fiscal stimulus that could blunt the recovery,” he said.

Meanwhile, Mr Bernanke praised the actions taken so far to restore stability to the financial system, saying the goal has been to provide a “self-sustaining, broad-based recovery”. However, he said that whether further funds will be needed depends on “the supervisory assessment of banks, the evolution of the economy, and other factors”.

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