By Scott Lanman
Dec. 10 (Bloomberg) -- More than a year into the credit crisis, Federal Reserve Chairman Ben S. Bernanke is still trying to establish how far he’s willing to go to aid troubled companies.
Bernanke, in a letter released yesterday, rejected the idea that the central bank should provide assistance to automakers, saying that such aid would involve the Fed in “industrial policy,” an area best left to Congress. The letter came in response to a Dec. 3 inquiry from Senate Banking Chairman Christopher Dodd.
The exchange reflects uncertainty over the limits of the Fed’s willingness to act following conflicting signals Bernanke has sent this year. While the Fed rescued Bear Stearns Cos. and American International Group Inc., it refused to intervene on behalf of Lehman Brothers Holdings Inc. -- only to see Lehman’s failure trigger widespread losses and worsen the credit crisis.
Bernanke is attempting to re-establish a clear line: that the central bank will only assist firms vital to the financial system, a definition that would exclude companies such as General Motors Corp.
“He’s absolutely right to draw that line,” Martin Feldstein, the Harvard University economist who chaired President Ronald Reagan’s Council of Economic Advisers, said in an interview with Bloomberg Television. The Fed is responsible for the “health and stability of the financial sector,” and “it would be a very big departure to start doing auto companies and who-knows-what-else,” Feldstein said.
‘Healthy’ Finance
Bernanke’s comments came in a letter dated Dec. 5 to Dodd, who requested the Fed chief’s position on the automakers’ reorganization plans and whether the central bank has authority to lend to the companies.
“American manufacturing is just as important to our nation’s economy as a healthy financial sector,” Dodd said in a statement. “I look forward to continuing my oversight and work with the Fed to accomplish the goals that we both agree will secure American jobs and stabilize our economy.”
Congressional Democrats and White House negotiators last night agreed on the outlines of a $15 billion plan to give GM and Chrysler LLC federal loans to stay in business while requiring them to restructure their operations.
“Bipartisan hard work has paid off and I understand an agreement has been reached,” Senator Carl Levin, a Michigan Democrat, said in a statement late yesterday. GM and Chrysler have said they need at least $14 billion in combined aid to keep from running out of cash by early next year.
Car Czar
The legislation would include the appointment of a so- called car czar who could force the companies into Chapter 11 bankruptcy if the companies don’t come up with their own plan by March 31, a Bush administration official told reporters on the condition of anonymity.
“What the Fed does should be ratified by the Treasury and ultimately by the Congress,” Feldstein said. “If the Congress is telling us right now, ‘No, we don’t want to provide that money to the auto companies,’ then surely the Fed shouldn’t be providing it.”
Bernanke said in the letter to Dodd that the central bank can only lend in emergency circumstances when the financing can “be secured to its satisfaction.” It’s “unclear” whether the three U.S. automakers could “meet this requirement.”
New Policy Realms
“Even if the companies have sufficient collateral, lending to an auto manufacturing company would represent a marked departure from that policy, and would take us into distinctly new realms of policymaking,” Bernanke said. “In particular, it would raise the question as to whether the Federal Reserve should be involved in industrial policy, which has traditionally been outside the range of our responsibilities.”
The “critical unknown” in the automakers’ plans is “their ability to develop and produce vehicles that the public wants to buy,” Bernanke said.
The comments represent Bernanke’s first public remarks on whether the Fed would lend to the beleaguered industry. Two regional Fed-bank chiefs said last week that the issue was best left to Congress.
The letter also refines Bernanke’s position on the rescue of individual companies following criticism by economists and investors in recent months that his approach was inconsistent toward Bear Stearns, Lehman and AIG.
Tools Available
“In the absence of an appropriate, comprehensive legal or regulatory framework, the Federal Reserve and the Treasury dealt with the cases of Bear Stearns and AIG using the tools available,” Bernanke said in a Dec. 1 speech. Lehman didn’t have enough collateral, making its collapse “unavoidable,” he said.
After the failure of Lehman jolted credit markets, Congress passed the $700 billion Troubled Asset Relief Program on Oct. 3, authorizing Treasury to inject capital into banks. Under the Nov. 23 rescue of Citigroup Inc., the Fed agreed to backstop a $306 billion pool of distressed assets after the bank, the Treasury and the Federal Deposit Insurance Corp. assumed initial losses.
“We now have tools to address any similar situation that might arise in the future,” Bernanke said in his speech last week.
The Fed’s decisions during the past year to support financial firms and short-term debt markets were aimed at ensuring financial stability and supporting the economy, Bernanke said in the speech.
While the automakers have been affected by the credit crunch, it’s “difficult to assess” the broader consequences of one or more of the carmakers becoming insolvent, he said.
Even so, Bernanke urged lawmakers to consider alternatives to direct aid, such as an “orderly bankruptcy reorganization with government aid, and government assisted mergers.”
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
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