Economic officials: Bailout an economic necessity

Ben Bernanke didn't sugarcoat the situation. He couldn't.

Financial market conditions had degenerated to a full panic, credit is frozen, money market funds are losing money. Even strong institutions such as Wall Street's remaining investment banks were under extraordinary pressure, the Federal Reserve chairman told House Republicans in a briefing Friday.

Leave things unchecked, he said, and face deep and extended recession, according to notes taken by a House GOP aide at the session.

At one remarkable meeting in the Capitol on Thursday night and in a series of conference calls the next day, Bernanke and Treasury Secretary Henry Paulson laid out nothing less than a nightmare scenario if Congress failed to pass a plan to use breathtaking amounts of taxpayer money to bail out the financial markets.

Fear is a great motivator — and it helps explain lawmakers' quick bipartisan embrace of the massive federal intervention in the markets.

Don't go along, Paulson said Thursday night at the meeting with leaders in both parties, and Wall Street's collapse will mean a global economic crisis. Bernanke warned of a profound recession without immediate action. The remarks were characterized by two congressional aides in the room, who required anonymity to discuss the private meeting.

"The room got very serious, very quickly," said a House Democratic aide who attended the session.

"When you listen to them describing this, you gulp," said Sen. Charles Schumer, D-N.Y. He said he felt the weight of "history hanging over them" in the room.

House Financial Services Committee Chairman Barney Frank, D-Mass., was at the meetings, too. But just as telling, he said Friday, was a conversation he had with a big lender who warned Frank that he was about to be unable to issue car loans. The panic on Wall Street was infecting Main Street and it was time to act.

House Speaker Nancy Pelosi, D-Calif., did tell Paulson that lawmakers were being asked to swallow a bitter pill, according to Democratic aides. She said the bailout proposal should include Democratic priorities such as extending unemployment insurance and providing aid to ailing state governments to pay for Medicaid shortfalls.

With a cost of $700 billion and the intrusion into the free market, the proposal is drawing reservations from Democrats and Republicans. Some feel they are being stampeded.

But Bernanke and Paulson carry great weight on Capitol Hill.

"This is the most severe economic situation our nation's been in since World War II," Bernanke told Republicans on Friday, according to notes taken by a House GOP aide. "There is no choice" but to pass the plan, Paulson said, adding that failure to do so would be a disaster.

They also apparently carry great weight with President Bush, who told reporters Saturday the dire picture they painted overcame his initial reluctance to put forward the package:

"My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became."

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