The three most powerful men governing US financial markets lined up on Capitol Hill in Washington yesterday for an unprecedented display of unity aimed at calming the febrile atmosphere surrounding the country's banking system.
Ben Bernanke, chairman of the Federal Reserve, the US central bank, admitted the economy faced "numerous difficulties" but – flanked by Treasury secretary Hank Paulson and Christopher Cox, chairman of Wall Street's regulator, the Securities and Exchange Commission – he promised that restoring financial stability was now the Fed's top priority.
The trio's testimony came amid further wild gyrations on the world's financial markets and scenes of Americans queuing to withdraw what remains of their savings from the collapsed regional bank, IndyMac, which was taken over by the government last week.
All three walked a tightrope between acknowledging the severity of the crisis in confidence and reassuring savers and investors who might be panicked into provoking just the kind of "run on the bank" that could take down another big institution.
Mr Bernanke said the failure of IndyMac had been "inevitable" because of the California bank's own particular cocktail of sub-prime mortgage assets and bad loans. Hundreds of other small regional banks could go under, Wall Street analysts believe, but Mr Bernanke said the banking sector had gone into the current crisis relatively well capitalised.
But he added: "Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain... Helping the financial markets return to more normal functioning will continue to be a top priority of the Federal Reserve."
Mr Paulson was roasted by lawmakers angry that the administration has effectively asked for a "blank cheque" from Congress to help prop up the mortgage finance giants Fannie Mae and Freddie Mac, which stand at the heart of the US mortgage market. On Sunday, Mr Paulson announced that the Treasury would pump money into the two companies if their losses spiralled or a crisis of confidence caused them short-term funding difficulties, but he had refused to set a limit on the number of billions of dollars that might be needed.
Mr Paulson said: "The way to minimise the chance that this facility will ever be called upon will be to take any questions off the table and provide as much flexibility as possible."
In his testimony, Mr Bernanke appeared to reverse the Fed's earlier position – outlined after the June meeting that held interest rates steady at 2 per cent – which had suggested the risks to economic growth had eased a little. There was now considerable uncertainty, he said.
His words sent share prices plunging, only for them to reverse after a similar reaction in the oil price helped alleviate concerns that high fuel prices are crippling US consumers. Oil was at one point off $9 to below $136 in New York trading as President George Bush said demand for fuel was moderating in the US, and it settled last night at $138.74.
In the UK, the FTSE 100 had ended 128.5 points lower at 5,171.9 and the US Dow Jones Industrial Average, having swung in a 300-point range, closed down 93 at 10,962, below 11,000 for the first time in two years.
Two US government reports underlined the dilemma facing the Fed, which is trying to stimulate an economy suffering from sliding house prices at the same time as keeping inflation in check. Sales at retail stores barely edged up in June, but producer prices, which reflect wholesale inflation, were up 9.2 per cent over June 2007, the largest annual increase since 1981.Reuse content