Bernanke said the Fed had no choice but to aid AIG. And he urged the Senate to move aggressively today to avoid long-term stagnation. In the end, the comments from officials in Washington did little to bolster investors' confidence in the economy.
On Tuesday, the 30-stock Dow Jones industrial average fell 37.27 points, or 0.55%, to 6,726.02. The broad S&P 500 index was down 4.49 points, or 0.64%, to 696.33. The tech-heavy Nasdaq composite index edged down 1.84 points, or 0.14%, to 1,321.01.
Treasuries also moved lower as Bernanke unveiled the TALF program and defended the Fed's actions to counter global financial crisis. The TALF (Term Asset-Backed Securities Loan Facility) will fund up to $1 trillion of non-recourse loans to investors who purchase AAA-rated asset-backed securities. "The program could represent a turning point for the economy and the financial markets by jumpstarting lending in critical areas of the economy and by reviving the asset-backed securities market," wrote Tony Crescenzi at Miller Tabak in a note Tuesday.
But investors were weary after Monday's 4% drop in the major indexes, sending the Dow Jones industrial average below the 7,000 level for the first time since 1997. Other key market indexes were at multi-year lows as well, with the S&P 500 index barely holding above the 700 level.
Traders are looking for a bottom to one of the worst bear markets in decades, notes S&P MarketScope.
The focus was on Washington today for clues about the economy and government policy moves.
Ben Bernanke testified to the Senate Budget Committee on the economy and budget outlook. Bernanke said the AIG situation is "uncomfortable" for him, but the government had no choice but to aid the company because its mistakes could undermine the global economy. He said AIG virtually formed a hedge fund that took many irresponsible actions of insuring bets of other countries. However, he again said there was no choice but to bailout AIG as the insurance giant's failure would have jeopardized taxpayer investments. Separately, he said TALF is designed to entice banks to lend money and provide credit to businesses.
Treasury Secretary Timothy Geithner told the House Ways and Means Committee Tuesday that Obama entered office facing a $1.3 trillion deficit -- about 10% of the nation's economic output. Republicans have complained that Obama's budget proposal would balloon the deficit even higher, to $1.75 trillion. Geithner said that additional spending is necessary because the previous administration was unwilling to make long-term investments in health care, energy and education.
Geithner also echoed Bernanke's view earlier that "failure to reduce future deficits will crowd out investment and reduce living standards." He blamed the credit contraction for job losses, business declines and financial sector pressure.
Geithner's House testimony mainly reiterated the Obama Administration's policy platform outlined in the President's State of the Union address. That included a focus on education, healthcare reform, tax and energy policies, but not a lot of specifics so far on any new bank rescue plans. Most of the comments have been on the defensive, squaring the administration's hefty priorities against long-term fiscal responsibility, which has been reiterated several times, balancing the costs of inaction against taking decisive action near-term. Unless there are some more specifics soon, equity investors may get impatient again, says S&P MarketScope.
In other markets Tuesday, gold futures fell to $914.00, while crude oil futures rose to $40.31 a barrel. The dollar index was off 0.06 to 88.97 as Treasury Secretary Timothy Geithner defended Obama's $3.6 trillion budget and Bernanke battled questions about the AIG bailout before congressional committees. Obama joined British Prime Minister Gordon Brown in calling for a global solution to the economic crisis and both leaders vowed to repair their countries' shattered financial systems.
On the data front, Tuesday's calendar was light, with the January pending home sales index falling 7.7%.
General Motors (GM), Ford Motor (F) and Toyota (TM) reported sharp declines in U.S. light-vehicle sales for February as consumers with record-low confidence remained out of showrooms, extending a sales plunge that began in September and threatens the viability of multiple auto makers. GM's sales fell 53%, Ford's sales dropped 48% while Toyota's declined 40%.
January auto sales hit a 27-year low, with February expected to be at similar levels and 2009 sales estimates continuing to be pared. The year is widely expected to result in the fewest U.S. auto sales in decades. Jeff Schuster, executive director of global forecasting at J.D. Power & Associates, expects February and March to be the year's low point.
Traders are looking ahead to Friday's employment report, which could indicate how much longer the U.S. economic pain will last.
President Barack Obama sent his Treasury secretary and budget director to Capitol Hill to defend his proposed tax increases, which are being met with misgivings by both Republicans and Democrats in Congress. The Associated Press said lawmakers in both parties question Obama's call to reduce high-income earners' tax deductions for the interest on their house payments and for charitable contributions. Also drawing fire is his proposal to start taxing industries on their greenhouse gas pollution -- a move sure to raise consumers' electric rates.
McCormack is senior producer for BusinessWeek.com's Investing channel.