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A change of course and tone

Treasury Secretary Henry Paulson speaks to Federal Reserve Chairman Ben Bernanke during today's House Financial Services Committee hearing on Capitol Hill.

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KAI RYSSDAL: I don't know who gave who a ride up to the Capitol this morning, but the Fed Chairman and the Secretary of the Treasury made the trip to deliver the second act of the week's economic drama.

The plot twist was a creeping change of policy: Henry Paulson made it known the White House has decided to consider letting Fannie Mae and Freddie Mac buy up jumbo loans -- mortgages of more than $417,000. Something it's been opposed to until now.

HENRY PAULSON: Owning a home is a cherished part of the american dream and we do not want to unreasonably deny that dream by restricting credit for those who can afford it.

Key line there: "For people who can afford it." Fed Chairman Ben Bernanke said letting Fannie and Freddie into the jumbo market needs to happen soon, to help the liquidity crisis.

BEN BERNANKE: If it's not prompt, it's not going to be productive -- because these markets will recover, and if it comes on line in March it will be counter-productive.

Move fast, in other words, or it won't ease the credit crunch in time. But in time for what? Mr. Bernanke's the one who until Tuesday's rate cut has been saying everything's pretty much all right with the economic fundamentals. And in his rush to get Congress moving, he had a second alarm-bell line in his testimony this morning.

We sent Marketplace's Steve Tripoli to find out what's bugging the Fed chairman. if the economy's all right.


STEVE TRIPOLI: Here's that other line from Bernanke that caught peoples' attention today. He didn't say it before Congress, but in the transcript of his speech were these words:

BERNANKE: Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans.

Now Bernanke wants Congress to get going. The Fed itself moved quickly and surprisingly with this week's big rate cut. Does that mean Bernanke really is worried about the state of the economy? Standard and Poor's chief economist Dave Wyss doesn't think so. Yet.

DAVE WYSS: Well, I think the Fed would argue that the fundamentals are strong, that the economy is not heading for a recession. But they want to make sure of it.

So what's the worry if it's not the fundamentals?

WYSS: The bigger problem is the market panic, and the inability to refinance a lot of these loans right now.

Wyss says economies don't just float on fundamentals. They also float on psychology -- and when credit's frozen, and the news is full of depositors making a run on a British bank, people like Bernanke get nervous. At this point, Wyss welcomes that nervousness.

WYSS: I want him to be worried. If he's not worried, then I'm really worried.

Former Clinton Administration economic adviser Alan Blinder says it's no accident -- sound fundamentals and all -- that central banks around the world are moving fast as what's called "lenders of last resort."

ALAN BLINDER: The reason I bring the jargon term up is the "last resort" is an important part of that phrase. This refers to what you do in things are perceived as emergencies.

Blinder says this emergency is big enough to torpedo even sound economic fundamentals if the watchdogs don't stay alert. I'm Steve Tripoli for Marketplace.

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