Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.

``Economic activity appears to have decelerated broadly,'' Bernanke said today to a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16. ``Stabilization of our financial system is an essential precondition for economic recovery.''

Bernanke's comments, his most dire about the economy since he became central bank chief in 2006, may stoke investors' expectations the Fed will lower interest rates by year-end to alleviate the credit crisis. He reiterated his call for Congress to pass Treasury Secretary Henry Paulson's plan for a $700 billion fund to remove devalued assets from the banking system.

Without the bailout, ``credit will be restricted further for homeownership, for small business, for individual consumers and so on, but that is not just an inconvenience,'' Bernanke said. ``What that is going to do is affect spending and economic activity and it will cause the economy as a whole to decline and be much weaker than it otherwise would be.....''

Billionaire investor Warren Buffett, calling the market turmoil ``an economic Pearl Harbor,'' said Treasury Secretary Henry Paulson's $700 billion proposal to prop up the U.S. financial system is ``absolutely necessary.''

``The market could not have taken another week'' like last week, Buffett told CNBC today, a day after saying his Berkshire Hathaway Inc. will buy a $5 billion stake in Goldman Sachs Group Inc. ``I think it was the last thing Hank Paulson wanted to do, but there's no Plan B for this.''

Paulson and Federal Reserve Chairman Ben S. Bernanke are pushing Congress to quickly approve the plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber- stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans questioning the plan's reach and size.....

In the days since Treasury Secretary Henry Paulson released his $700 billion plan to restore stability to financial markets, the essential point has been lost in all the complaints about bailing out banks and greedy executives.

Why should such institutions be helped when ordinary American taxpayers -- who have managed their own finances prudently and are being battered by a loss of wealth and jobs -- have to pick up the tab?

Because there's no choice.

The fuss about the purpose of the plan and the sense that it was really just intended to help a bunch of fat cats had reached a point that Federal Reserve Chairman Ben S. Bernanke, testifying yesterday before the Senate Banking Committee, stressed that he was a college professor, had never worked on Wall Street and had no connection to it. His only concern, he said, was the future of the economy.

The credit markets are in a ``fragile condition'' and not functioning properly, Bernanke said. If no action is taken, more jobs will be lost, more houses foreclosed and the economy will contract because credit won't be available.

``There will be significant adverse consequences for the average person in the United States,'' Bernanke said.

Senator Sherrod Brown of Ohio, a Democrat, said people in his state have a ``universally negative'' view of the costly plan.

That's no doubt true. However, it's up to Brown and other members of Congress to understand and to explain to their constituents that something has to be done to stabilize the markets. And it has to be done as quickly as possible.....

“I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained,”

We think it is near the bottom. It will take a while to work its way through the system. Fortunately for us, we have a very diverse, healthy economy. There are other things that are positive that are offsetting that.

…So my very strong view is that we are near the bottom and that this will be contained as — the housing will be contained, and we’re fortunate that we have a diverse, healthy economy.

“The market has focused on this. There’s a wake-up call, and there’s an adjustment to this repricing of risk, but I see the underlying economy as being very healthy,” he told reporters before leaving Beijing.

Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was “largely contained,” despite losses in a number of financial institutions and a long period for subprime issues to move through the economy.

“I have no interest in bailing out lenders or property speculators. Still, we must recognize the very real harms to families affected by the housing downturn,” Paulson said

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“I’ve seen turbulence in the market a number of times and I can’t think of any situation where the backdrop of the global economy was as healthy as it is today,” he said.

‘The worst is likely to be behind us,’ Paulson told the paper, in one of the most optimistic comments by a top U.S. finance official since sub-prime mortgage losses set a domino effect in motion in mid 2007.

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

And I'm not putting my faith in a politician (DeMint) to produce a solution. I'm simply sharing his pessimism.

Now, please enlighten me as to why I'm completely wrong. In all seriousness.

Healthy pessimism is fine. Trust me, I'm not happy that we've come to this situation. I play by the rules, I pay my taxes, I live responsibly and haven't overleveraged - trust me - I'm FUCKING PISSED. But I have to set aside my instincts to say let the house of cards crumble because I realize how dire the situation is. If corporations can't fund their ongoing daily cash needs, if banks won't lend to each other, if consumers can't get credit - WE ARE ALL FUCKED.

If you have a better idea, I'd love to hear it.

But is there a legit reason for why this must be completed, signed, & passed by Friday? Is there not time left to come up with one?

While Wall Street worked its way through a quiet day, the credit markets remained under siege Wednesday.

Crucial arteries in the nation’s financial system — which keep money flowing to businesses and consumers for car loans, credit cards and payroll payments — are clogging up as banks become increasingly wary of lending cash.

Interest rates on short-term loans jumped back toward the record levels seen at the end of last week, before the release of the government’s bailout plan provided a temporary balm for investors’ fears. But with the structure of the plan still undetermined, and a protracted political battle brewing over its fate, anxiety has started to ratchet up again.....

The only money I have in the market is my 401k which I won't touch for another 40 years so no, I don't watch the markets day in and day out.

Would eliminating the Capital Gains tax and drastically lowering the Corporate tax rate not introduce enough capital into the market to remedy the situation?

Many Americans today are asking themselves how the economy got to be in such a bad spot.

For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.

Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.

Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.

Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.

Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.

These governmental measures, combined with the Federal Reserve's loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.

Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.

In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.

This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners -- in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers -- builders and other sectors connected to real estate that suffer setbacks.

The government doesn't like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.

I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.

Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.

Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.

It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.

The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.

Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.