WASHINGTON — The nation's leaders are running out of answers to America's economic crisis.
The Federal Reserve has no more practical room to push interest rates lower; there's only so much taxpayer money for shoring up housing, and if depositors lose confidence, there's little officials can do to stop a run on banks.
President Bush, speaking from a White House podium, and Federal Reserve chairman Ben Bernanke, in testimony to a congressional committee, sought on Tuesday to soothe jittery markets and reassure Americans that the U.S. financial system remains basically sound despite the current turmoil.
Bernanke warned that the U.S. economy faces "numerous difficulties," that the outlook for inflation is unclear and that "financial markets and institutions remain under considerable stress."
The parade of bad economic news continued Tuesday. Wholesale prices jumped 1.8 percent in June, pushed higher by surging energy and food costs. Over the past 12 months, wholesale prices have risen by 9.2 percent, the largest increase since June 1981.
After years of seeming tame, inflation is again on the rise, led by higher food and fuel costs. But the Fed, which usually fights inflation by boosting interest rates, finds itself unable to use that weapon anymore — it already has pushed rates down to 2 percent from 5.25 percent in response to the housing crisis — without threatening to undermine an economy that is either in recession or growing anemically.
With soaring budget deficits, swollen from the costs of wars in Iraq and Afghanistan and increased spending on homeland security, there's only so much taxpayer money for bailing out failing financial institutions.
Stocks are in a bear market, with the Dow on Tuesday closing below 11,000 for the first time since July 2006, and shares of banks and other financial companies have been pounded.
"I fear that we're sitting on a financial powder keg," Bernanke was told by Sen. Richard C. Shelby of Alabama, senior Republican on the Banking Committee.
And the risk of runs on banks is still present, although minimized by federal deposit insurance on accounts up to $100,000 and by other federal safeguards.
Regulators seized IndyMac, a large California-based savings and loan bank, on Friday after hundreds of depositors lined up to withdraw funds at branches. The bank reopened Monday under federal control.
The administration unveiled a rescue plan for Fannie Mae and Freddie Mac, but it has not put a price tag on it. Treasury Secretary Henry Paulson said the administration did not intend to nationalize the companies and wanted to preserve their shareholder-owned structure. Still, he said a regulatory overhaul was needed.
Congress is also working on legislation that would modernize the Federal Housing Administration and create a new regulator and tighter controls for Fannie Mae and Freddie Mac.
If the government wound up taking over the two companies, it would have to assume more than $5-trillion in mortgage debt that the two companies now either own or back. That would add to a federal debt fast approaching the $10-trillion mark.