Fed's Geithner: policy-makers must act forecfully

WASHINGTON (Reuters) - Global credit markets face continuous challenges that require forceful action from policy-makers, New York Federal Reserve President Timothy Geithner said on Thursday.

"Liquidity conditions in markets are still substantially impaired and the process of de-leveraging remains underway," he told lawmakers of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

"This will amplify the headwinds facing the U.S. and global economy. In this context, policy makers and financial market participants need to continue to act forcefully."

Geithner justified the Fed-funded J.P.Morgan buyout of Bear Stearns as the lesser of two evils, saying the risks of allowing the bank too fail were too great and unpredictable.

"We judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy, with lower equity prices, further downward pressure on home values, and less access to credit for companies and households," Geithner said in prepared remarks.

He said the Fed has been scrambling to use rules originally devised for the oversight of larger depository institutions in a world largely dominated by firms that operate outside traditional banking lines.

Geithner argued that apart from immediate crisis management, a sweeping overhaul of current financial regulation was necessary to ensure stability by strengthening bank cushions against the troubles they are now experiencing.

"Actions to strengthen the capacity of the major government sponsored enterprises, the Federal Housing Finance Board, and the Federal Housing Administration to provide finance to the mortgage market and help reduce the risk of avoidable foreclosures are a very important complement to the broader policy actions already in place," he said.

BAD NEWS BEAR

Geithner went to extensive length to justify the Fed's role in bailing out Bear Stearns, which many, including in Congress, have argued amounts to a taxpayer bailout of a reckless financial institution.

The New York Fed chief argued that only was the cost of doing nothing too high, but also that the equity losses suffered by Bear shareholders were sufficiently deep to discourage future irresponsible risk-taking.

"The actions that we took were intended to protect the economy from the consequences of risks to the financial system that could have decreased the availability of home mortgage and other credit, put further downward pressure on home values, eroded retirement savings, and ultimately led to a loss of jobs and incomes as businesses faced added difficulties in financing expanded operations and job creation," Geithner said.

(Reporting by Pedro Nicolaci da Costa and Karey Wutkowski, Editing by Chizu Nomiyama,)