Bernanke says Fed reluctant to lend to car makers

WASHINGTON (Reuters) - The U.S. Federal Reserve would be reluctant to lend to auto makers, particularly if Congress had decided against a bailout for the sector, Fed Chairman Ben Bernanke told lawmakers in a letter made public on Tuesday.

"The Federal Reserve would be extremely reluctant to extend credit where Congress has actively considered providing assistance but, after due consideration, has decided not to act," Bernanke said in a December 5 letter to Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

Bernanke, in response to a letter from Dodd, said the Fed has invoked its emergency authority to lend to Wall Street firms to protect financial stability, which in turn was necessary to shield the broader economy.

"Even if the companies have sufficient collateral, lending to an auto manufacturing company would represent a marked departure from that policy," he said.

Extending credit to car makers would fall in the realm of industrial policy, which is Congress' role, Bernanke said.

The central bank has taken emergency steps when there was "no time for deliberation and action by the Congress" and any delays could have resulted in a crash of the financial system, the Fed chairman said. The plight of car companies has evolved over a lengthy period and has been subject to congressional hearings and debate, he said.

In addition to providing federal aid to car makers, Congress should consider assisting reorganization through bankruptcy or government-assisted mergers, the Fed chairman said.

The chief executives of the traditional U.S. auto companies -- General Motors Corp, Ford, and Chrysler LLC -- have made several trips to Capitol Hill to plead for federal help to survive the economic downturn. Lawmakers fear that if the car companies, which employ around 250,000 workers, collapse, it could reverberate disastrously in an economy that has been in recession for a year.

The Fed stepped in with emergency credit to prevent the collapse of investment bank Bear Stearns in March and insurer American International Group in September. It threw open its direct loan window to Wall Street firms this year in a bid to stabilize financial markets in the grip of a severe credit freeze.

Dodd said at a hearing last week that the Fed and the Treasury Department should step up to help the car companies, which were seeking around $34 billion in federal aid, with less money than they spent to prop up financial firms.

"There ought to be a way to come up with a far smaller dollar figure to protect this economy from the unintended consequences that would be unleashed by the collapse of the automobile industry," he said.

In response to Bernanke's letter, Dodd said the Fed's task is to maximize employment and economic growth.

"I believe that American manufacturing is just as important to our nation's economy as a healthy financial sector," he said in a statement.

(Reporting by Mark Felsenthal; Editing by James Dalgleish)