WASHINGTON (AP) - Senators took aim Thursday at Federal Reserve
Chairman Ben Bernanke, linking him to rising unemployment,
regulatory lapses that led to the financial crisis and the
corporate bailouts that followed.
And some warned that the Fed's record-low interest rates could
feed a new speculative bubble.
Bernanke remained stoic during the roughly five-hour hearing by
the Senate Banking Committee, which is weighing his nomination to a
second four-year term. He acknowledged some mistakes but defended
his record, saying that without the Fed's bold action, the crisis
would have been "markedly worse."
And by day's end, despite the verbal swipes and a move by one
senator to block Bernanke's nomination, his confirmation didn't
appear in doubt.
Some senators credited Bernanke with helping keep the Great
Recession from becoming a second Great Depression.
Sen. Christopher Dodd, D-Conn., chairman of the panel, predicted
Bernanke would win confirmation.
"Under your leadership, the Fed has taken extraordinary actions
to right the economy," said Dodd. "These efforts played, in my
view, a very significant role in arresting the financial crisis."
Nonetheless, Dodd wants to strip the Fed of some of its powers,
including overseeing banks because regulators failed to crack down
on dubious mortgages and other problems that figured prominently in
the financial crisis.
Dodd and others drew a distinction between Bernanke's economic
leadership and the operations of the Fed as an institution itself.
If confirmed to another term, Bernanke vowed to work with
Congress to overhaul the nation's financial regulatory structure
and to bring about stronger and more effective supervision.
"It would be a tragedy if, after all the hardships that
Americans have endured during the past two years, our nation failed
to take the steps necessary to prevent a recurrence of a crisis of
the magnitude we have recently confronted," Bernanke told the
Efforts already have begun at the Fed to tighten oversight of
banks and other financial firms. And the central bank is actively
engaged in identifying and implementing improvements, Bernanke
"A financial crisis of the severity we have experienced must
prompt financial institutions and regulators alike to undertake
unsparing self-assessment of their past performance," the Fed
Bernanke, 55, has taken heat for failing to detect early signs
of the housing collapse. Lax regulatory oversight by the Fed and
others was blamed for contributing to the crisis.
"The Fed has done a horrible job as a regulator," said the
committee's top Republican, Sen. Richard Shelby of Alabama.
"We didn't do a perfect job by any means," Bernanke
acknowledged. But he added: "We didn't do the worst job" either.
Bernanke acknowledged that lapses were made.
"I did not anticipate a crisis of this magnitude, this
severity," Bernanke said. Many banks weren't adequately prepared
and lacked sufficient capital buffers against losses. "That is a
mistake we won't make again."
At the same time, Bernanke argued that the Fed must remain
"effective and independent" to make decisions that may be good
for the economy but unpopular with politicians or the public. That
was directed at a provision - passed by a House committee on
Wednesday - that would subject the notoriously secretive Fed to
congressional audits. Bernanke fears that could interfere with
crucial decisions about interest rates.
Bernanke said the Fed stands ready - when the time is right - to
reverse course and start boosting interest rates to prevent
inflation from flaring up. As part of that process, the Fed would
need to soak up an unprecedented amount of money - trillions of
dollars - it poured into the economy during the crisis.
"We are confident that we have the necessary tools to do so,"
Bernanke said. He didn't say when the Fed would start raising
rates, although private economists think that will happen late next
The central bank's forceful and aggressive actions prevented the
devastating crisis from getting even worse, Bernanke said.
Drawing on lessons learned as a scholar of the Great Depression,
Bernanke rolled out a slew of bold and unprecedented programs to
help ease credit clogs and spur lending. He coordinated emergency
relief actions with central banks overseas. He slashed a key
lending rate to a record low near zero.
Those steps - along with a $787 billion stimulus package -
eventually helped pull the country out of recession. The economy
has now entered a fragile recovery.
Even so, it probably won't be strong enough to stop the
unemployment rate - now at a 26-year high of 10.2 percent - from
rising into 2010, Fed officials and private economists say. And
that poses a threat to lawmakers in next year's congressional
Bernanke said it is too early to decide whether additional
government aid is needed to bolster the recovery and spur job
creation. The White House was holding a summit Thursday to explore
new ideas to get Americans back to work.
Some senators and others also worry that the Fed's super-low
rates could feed a new speculative bubble.
Bernanke told lawmakers he didn't see any bubbles at this point
in the U.S. He also said it is not the United States'
"responsibility" to prevent speculative bubbles in other parts of
Regulation would be the first line of defense against bubbles
forming, said Bernanke, who didn't rule out using higher interest
rates to pop them. The Fed is keeping watch, monitoring major
credit and stock markets to look for "misalignments," he said.
The biggest sore point with the public - and their
representatives - was the government's bailout of Wall Street, even
as ordinary Americans suffered. The multibillion-dollar bailouts of
American International Group Inc. and other financial firms that
continued to hand out huge bonuses sparked fury. They also fueled
worries that the Fed's moves would encourage further reckless bets
"You are the definition of a moral hazard," huffed Sen. Jim
Bunning, R-Ky., the only senator who opposed Bernanke's
confirmation four years ago and said he'll do so again.
"The AIG bailout alone is reason enough to send you back to
Princeton" where the Fed chief taught economics for 17 years,
Bunning said. "Your time as Fed chairman has been a failure."
Bunning vowed to "do everything I can to stop your nomination and
drag out this process as long as I can."
In response to the bailouts, some lawmakers not only want to
rein in the Fed, as Dodd would do, but also subject it to deeper
Sen. Bernie Sanders, an independent from Vermont, said he's so
upset about the bailouts he plans to try to block Bernanke's
nomination by putting a "hold" on it when it reaches the Senate
floor. Essentially that means the Senate would need 60 votes to
approve the nomination, rather than a simple majority. That could
slow the approval process but is unlikely to derail it.
Treasury Secretary Timothy Geithner, in an interview on CNBC
Thursday, said: "We're confident he'll be confirmed."
Geithner, who was chief of the Federal Reserve Bank of New York
before taking the Treasury job, credited Bernanke with "enormous
creativity and bravery" in confronting the financial crisis.
"We're lucky to have him in the job," Geithner said.
(Copyright 2009 by The Associated Press. All Rights Reserved.)