Highlights: Bernanke's testimony

WASHINGTON (Reuters) - The following are highlights of Federal Reserve Chairman Ben Bernanke's testimony on Tuesday to the Senate Budget Committee on the budget and economic outlook.

BERNANKE ON PUBLIC ANGER OVER BAILOUTS:

"I understand why people are angry. I, as I have said, have been very angry on a number of circumstances. I am generally an even-tempered kind of person. It is unfair that money is going to big corporations. We are in a situation though, where we need to stabilize the financial system. If we don't stabilize the financial system, we have no hope of the getting the economy back to normal steam. When that fire is put out, then we need to think hard as a country how we are going to make sure this does not happen again."

BERNANKE ON CITIGROUP

"Citigroup is certainly under stress, but our belief is that it has enough capital, it meets the criteria for being well-capitalized, it's got a plan for restructuring, and we're going to work intensively with Citigroup to make sure that it's stable going forward.

"Not to say it doesn't need strengthening, not to say that other banks don't need strengthening, I didn't mean to say that banks weren't under stress, I don't think I said that."

BERNANKE ON DEBT/GDP RATIO:

"We have to make sure that in the medium term we have a fiscal position that will allow, and I use this as a rule of thumb,...the debt-GDP ratio not to be growing so that we can assure ourselves we'll be able to finance those debts at a reasonable rate and not impose excessive burdens on our children and grandchildren.

"There is no magic number but I would hope that given that we're going to be above 60 percent I hope we don't we go higher than that. I'd like to see us try to come back down gradually over time."

BERNANKE ON DOLLAR, RESILIENCE OF U.S. ECONOMY:

"Confidence in U.S. economy is one reason why the dollar has actually done relatively well compared to some other currencies."

"I do think the American people in the past have shown an excellent ability to respond to adversity and I believe it's going to happen this time and we're going to see a much stronger economy not that far in the future."

BERNANKE ON DEMAND FOR TREASURIES:

"It's very hard to know how much higher the debt to GDP ratio could be before the international financial markets begin to balk, and so I think the prudent thing to do is try to maintain stability in the debt to GDP ratio.

"The markets will be quite able to absorb, for example, the large amount of issuance we're seeing in the next couple of years if there is a reasonable expectation and confidence in the same markets that the United States is serious about getting its budget position under control in the longer term."

BERNANKE ON BANK NATIONALIZATION; NO 'ZOMBIES":

"We ... don't think that nationalization is either warranted or necessary, but we are prepared, even as -- and I think the American people have the right to expect -- that as public money goes into institutions, particularly where there is a substantial ownership share, that there will be very close supervisory oversight to make sure that: A - the banks are not taking excessive risks; B - that they're taking steps necessary to restructure themselves and to restore themselves to viability and health; and C - that they're making appropriate credit decisions and are lending to help support the economy..."

"I don't think that any major U.S. bank is currently a 'zombie' institution. They're all lending, they're all active, and they're all viable."

BERNANKE ON TALF:

"Going forward, in conjunction with the Treasury's plan, we're prepared to go up to $1 trillion in credit, with the next area we're going to look at being commercial mortgage-backed securities. We know right now there's a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or pay for new construction because the CMBS securitization market has completely shut down."

BERNANKE ON LARGE FINANCIAL FIRMS:

"We have no structure, no legal and regulatory structure that allows us to resolve in a safe and sound way a large financial international conglomerate. And we're much better off, frankly, trying to resolve it within the context of continued operations than to allow it to fail and to allow all the chaos that would occur following a bankruptcy."

BERNANKE ON AIG:

"We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice. And I share your concern, I share your anger. It's a terrible situation, but we're not doing this to bail out AIG or their shareholders certainly. We're doing this to protect our financial system and to avoid a much more severe crisis in our global economy."

"This does give us the best chance both to achieve financial stability and as well to ultimately recovery most or all of the investments that the public has made in AIG."

"If there's a single episode in this entire 18 months that has made me more angry, I can't think of one (other than) AIG. AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large, stable insurance company (that) made huge numbers of irresponsible debts, took huge losses. There was no regulatory oversight because there was a gap in the system."

"We have been doing what we can to break the company up, to get it into a salable position and to try to defang it. We've done a lot, for example, to take off some of these dangerous counterparty positions that would create the contagion. So we're doing all we can to make it, you know, a safer institution as well as trying to get it to stabilize."

BERNANKE ON THE OUTLOOK:

"Wide margins of economic slack and reduced cost pressures suggest that inflation is likely to remain quite low over the next couple of years."

"Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation. The effectiveness of the policy actions taken by the Federal Reserve, the Treasury, and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit."

BERNANKE ON ELEVATED LEVEL OF FEDERAL DEBT:

"This is a development that all of us would have preferred to avoid. But our economy and financial markets face extraordinary challenges, and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end.

"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment, and incomes for an extended period."

BERNANKE ON OUTLOOK:

"Although the near-term outlook for the economy is weak, over time, a number of factors should promote the return of solid gains in economic activity in the context of low and stable inflation. The effectiveness of the policy actions taken by the Federal Reserve, the Treasury, and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery. If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.