Obama budget hopes meet bailout rage

Government's rescue team goes before Congress, but budget hearings serve as forum for larger questions about consequences of financial fixes.

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By Jeanne Sahadi, CNNMoney.com senior writer

Is President Obama right to say stocks may be a good long-term investment?
  • Yes, prices are low enough to buy
  • No, the market will be down for a long time

NEW YORK (CNNMoney.com) -- President Obama's economic A-team went to Capitol Hill on Tuesday to address questions about the administration's ambitious budget request.

But they also ended up being grilled on everything from the latest AIG bailout to the risk of propping up zombie institutions.

Proposals like Obama's plans to reform federal efforts on health care and energy are big heaves in normal times. Now the president has to sell his budget at a time when many lawmakers are worried about the effectiveness of the government's expensive efforts to stem the economic and financial crises so far.

That was made abundantly clear as Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke and White House budget director Peter Orszag testified in hearings before the House and Senate.

"It's not a partisan attack on you when you hear some of us saying that we are very concerned about where we're going to be at the level of federal debt in the next five years ... a lot of that hinges on how successful the plans that you're putting out there are," Rep. Devin Nunes, R-Calif., said to Geithner at a House Ways and Means Committee hearing.

All three officials stressed in their comments that the country has to embark on a two-pronged mission:

  • do all it can to combat the crises even though that means running up the deficit in the near term to record levels;\
  • make efforts to put the country on a fiscally sustainable course for the long run.

"We need to act, both to address the dramatic shortfall in national output in the near term and to tackle the medium- and long-term deficits that would ultimately become a drain on the nation's potential for economic growth," Orszag told the House Budget Committee.

But lawmakers find some of the near-term fixes -- like Monday's overhaul of the rescue of giant insurer American International Group -- harder to swallow than others.

"Yesterday, after it was reported that AIG lost $62 billion last quarter, an estimated $460,000 per minute, the federal government offered AIG yet another check," Sen. Ron Wyden, D-Ore., asked Bernanke at the Senate Budget hearing. "Small businesses across the country, who played by the rules, paid their bills on time, can't get a line of credit, while AIG seems to have an open spigot for taxpayer money."

Bernanke was asked variations of that same question throughout the hearing.

"Our belief was that to allow the company to fail at this juncture, putting aside its huge adverse affects on the financial system and on the economy, would have greatly also impaired the ability of the government to recover the investments that have already been made in the company," Bernanke said.

Lawmakers on both sides of the aisle would welcome that. But until there's evident return on the government's investments in its rescue and stimulus ventures, all they will see is the potential for red ink.

Bernanke was asked how high a debt level the country can carry without jeopardizing the ability of the Treasury to borrow.

"It's hard to judge in an explicit way," he said, noting that countries can for short times carry high rates of debt relative to their GDP but that the United States will have to stabilize its debt-to-GDP ratio in order to be able to borrow at favorable rates.

But ultimately, Bernanke said, "maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance." To top of page

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