U.S. Treasury secretary Henry Paulson took his bailout plan to get the credit markets moving again to the Senate baking committee Tuesday, calling for rapid action to adopt it.

Paulson said that Congress must quickly enact a program to stabilize the financial system “in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.”

He noted that the piecemeal approach it has taken so far —bailing out Bear Stearns & Cos. Inc., Fannie Mae and Freddie Mac and American International Group Inc., along with efforts to increase confidence in the system, “have been necessary but not sufficient.” Now, he said, the markets need action to address the root cause of the turmoil, “the housing correction, which has resulted in illiquid mortgage-related assets that are choking off the flow of credit which is so vitally important to our economy.

“We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively,” Paulson said.

He stressed that the proposed asset buyout plan is better than the alternative, and that “the ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system.”

“Over these past days, it has become clear that there is bipartisan consensus for an urgent legislative solution. We need to build upon this spirit to enact this bill quickly and cleanly and avoid slowing it down with other provisions that are unrelated or don’t have broad support. This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy,” he argued.

Meanwhile, U.S. Federal Reserve Board chairman Ben Bernanke also defended the Fed’s bailout efforts to the committee and called on Congress to support the Treasury’s bailout plan.

“The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements —for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down,” Bernanke said. “Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk.”

He argued that, in the cases of Fannie Mae and Freddie Mac, their capital needs were too large to be raised privately, and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. It stepped in, “to avoid unacceptably large dislocations in the financial sector,” he explained.

Bernanke noted that markets have seen benefits of this action in the form of lower mortgage rates, which should help the housing market.

Additionally, he stressed that the Fed and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, “but none was forthcoming.”

In the case of AIG, it decided to provide financing “because it judged that, in light of the prevailing market conditions and the size and composition of AIG’s obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy.”

“To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm’s owners, managers, and creditors,” he added.

As for Lehman Brothers, Bernanke said that while the failure of Lehman posed risks, “the troubles at Lehman had been well known for some time, and investors clearly recognized —as evidenced, for example, by the high cost of insuring Lehman’s debt in the market for credit default swaps — that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.”

“While perhaps manageable in itself, Lehman’s default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets,” he said; which pushed it to further actions to increase liquidity and stabilize markets.

@page_break@Despite these efforts however, he said that global financial markets remain under extraordinary stress. So, he called for further action by the Congress to, “stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”

He said the Fed supports the Treasury’s proposal to buy illiquid assets from financial institutions. “Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth,” Bernanke insisted.

He allowed that the shortcomings and weaknesses of the financial markets and regulatory system must be addressed, however, he said that “the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available.”