Bernanke defends Federal Reserve to sharply critical senators

Federal Reserve Chairman Ben S. Bernanke on Thursday defended the central bank’s record and argued for preserving its regulatory powers, but lawmakers in both parties were unmoved as they lobbed sharp criticisms at him and the Fed for lapses that contributed to the financial crisis.

Bernanke is widely expected to win a second term as chairman, but the confirmation hearing before the Senate Banking Committee provided new evidence of the intense resentment in Congress over what is seen as the Fed’s failure to tighten credit and curb financial risk-taking in time to avert the worst economic downturn since the 1930s.

During some four hours of sometimes-tense questioning and rebuttals, Bernanke acknowledged that the Fed was slow to exercise its authority to clamp down on banks that were taking excessive risks and to protect consumers from predatory lenders.

But he insisted that, after he moved up to the chairmanship from membership on the board of governors, the central bank took steps to strengthen its regulatory role. He said it would be a mistake to strip away the Fed’s bank-supervisory responsibilities, which the Senate is now considering as part of a financial regulatory overhaul.

In his prepared remarks, Bernanke also stated that he and others at the Fed had “acted promptly and forcefully to confront the financial crisis and its economic consequences.” Those actions included plowing hundreds of billions of dollars into propping up big financial institutions.

Without the Fed’s intervention, at least some of those institutions would probably have collapsed, undermining the stability of the larger economy. Bernanke said that without the strong efforts of the Fed and other parties, “the outcome could have been markedly worse.” But the bailouts, which came at a time when millions of ordinary Americans and small businesses had little protection from the punishing effects of the recession, have fueled widespread public anger toward the Fed.

The Banking Committee’s chairman, Sen. Christopher J. Dodd (D-Conn.), opened the hearing by complimenting Bernanke for helping arrest the economic crisis, and said he would support President Obama’s nomination of the longtime economics professor, a Republican, for another four years when his term expires in January.

However, Dodd’s voice sharpened in response to Bernanke’s argument that the Fed had the financial expertise to supervise banks and that such regulatory oversight went hand in hand with monetary policymaking and maintaining stability in the financial system.

“We should never have had to go through what we did the last two years, had there been cops on the street doing their job, telling us what was going on and allowing us to avoid the problem in the first place,” Dodd said.

“Why should I give an institution that failed in that responsibility the kind of exclusive authority we’re talking about?” Bernanke is also battling an effort that has bipartisan support in the House to broaden congressional oversight of the Fed, including scrutiny of the central bank’s monetary policy decisions. He told lawmakers at Thursday’s hearing that it was vital for the nation to maintain an independent central bank free from the influence of short-term political considerations.

Over the last year, Bernanke has campaigned publicly and met privately with dozens of members of Congress. It was hard to tell Thursday just how much of that has paid off, as he faced a barrage of criticisms from members of both parties.

Some Republican lawmakers accused him of failing to own up to his mistakes and shifting the blame to the private sector.

Sen. Jim DeMint (R-S.C.) recited half a dozen instances in 2007 and 2008 when Bernanke gave reassurances or downplayed concerns about the financial health of banks, the subprime market and the potential spillover to the broader economy.

DeMint recalled that Bernanke, in his prior confirmation hearing in 2005, listed four duties of the Fed. One of them, DeMint said, was “fostering stability of the financial system and containing systemic risk.”

“Has the Federal Reserve under your leadership accomplished that goal?” DeMint asked Bernanke.

The chairman, his face stern, replied: “No, but we also have lots of other co-conspirators in that problem.”

DeMint then added: “Another duty you listed was supervising and regulating the banking system to promote the safety and soundness of the nation’s banking system and financial system. Has the Federal Reserve under your leadership accomplished that goal?”

“We found some mistakes and we’ve tried to improve them,” Bernanke responded tersely.

DeMint said he would oppose Bernanke’s reappointment, as did Sen. Jim Bunning (R-Ky.), a longtime critic of the Fed, who told Bernanke during the hearing: “I will do everything I can to stop your nomination and drag out this process as long as I can.”

don.lee@latimes.com