In testimony before the United States Senate Banking Committee on Tuesday, both Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke urged lawmakers to move quickly and approve a plan to buy troubled assets from financial institutions.

“We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy,” Paulson said.

Over the past couple of weeks, U.S. government agencies have tried to keep shaky markets stable by seizing control of Freddie Mac and Fannie Mae, preparing market participants for the failure of Lehman Brothers, bailing out AIG, and creating a temporary guaranty program for the money market mutual fund industry. Still, he said these steps were not sufficient.

“More is needed. We saw market turmoil reach a new level last week, and spill over into the rest of the economy,” explained Paulson. “We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.”

The Treasury Department submitted legislation to Congress requesting authority to purchase up to US$700 billion of residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans.

Bernanke added that the Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions because it will reduce investor uncertainty. “More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.”

He stressed that it is essential to deal with the current problem. Democrats and the Bush Administration, however, are haggling over details of rescue package. The Democrats want mortgage aid for homeowners to be included.

“At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,” Bernanke said. “Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”

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