With Eye On Second Term, Bernanke Defends Record

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Federal Reserve Chairman Ben Bernanke faced tough questions from the Senate Banking Committee about the Fed's failures leading up to the financial crisis and the role it played in the bailout of Wall Street firms. While Bernanke is ultimately expected to be reconfirmed, the hearing may influence the Fed's future role in an overhauled financial system.

MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

He is a man who either saved the economy or helped to ruin it, depending on your point of view. Now, Ben Bernanke has a chance to spend four more years as chairman of the Federal Reserve. There is little doubt the Senate will confirm him for the job. But as NPR's John Ydstie reports, lawmakers made clear today there is strong disagreement about whether he deserves a second term.

JOHN YDSTIE: Bernanke's most passionate critic during his hearing before the Senate Banking Committee was Kentucky Republican Jim Bunning. Bunning made clear that he thinks Bernanke should be sent packing.

Senator JIM BUNNING (Republican, Kentucky): The AIG bailout alone is reason enough to send you back to Princeton.

YDSTIE: But Bunning didn't leave it at that. He spent his full eight-minute time allotment cataloguing Bernanke sins. First, the chairman's failure to recognize the housing bubble that sparked the financial crisis, and then his participation in the Wall Street bailouts once it hit.

Sen. BUNNING: Where I come from, we punish failure, not reward it. I will do everything I can to stop your nomination and drag out this process as long as I can.

YDSTIE: But the majority of senators, while acknowledging the mistakes that the Fed and Bernanke have made, credited the current chairman with taking actions during the financial crisis that saved the country from another Great Depression, among them was New York Democrat Charles Schumer.

Senator CHARLES SCHUMER (Democrat, New York): Easy to criticize, easy to say it could have been done a different way. But at that moment, action was needed and need a quickly or we would have had financial collapse. And you did act quickly and I hope my colleagues will remember that.

YDSTIE: New Jersey Democrat Robert Menendez asked Bernanke to describe what might have happened if the Fed had not acted.

Senator ROBERT MENENDEZ (Democrat, New Jersey): Give us a sense of what would have happened had we just, let's say, you know, let the markets to do it on their own.

Mr. BEN BERNANKE (Chairman, Federal Reserve) We could very well be in a depression-like situation with much higher unemployment than today, very deep decline in output and no immediate prospects for a recovery, unlike the situation we have today where we do see the economy growing.

YDSTIE: The cost to the economy, to the taxpayer, to the average person would have been much greater, Bernanke said. And he said, it's been difficult to convince people that he did not participate in the rescue of big financial firms because he cares about Wall Street.

Mr. BERNANKE: I'm not a Wall Street person. I'm an academic. I come from a small town. I did it because I knew from my studies that the collapse of the financial system would have extraordinarily bad consequences for Main Street. And that is why we did what we did. And I firmly believe we did the right thing.

YDSTIE: While the passion of Bernanke's critics was attention-getting, most senators seemed more focused on the other business before the banking committee: the overhaul of the nation's financial regulatory structure. Committee Chairman Christopher Dodd, a Connecticut Democrat, has proposed stripping the Fed of its power to regulate banks and giving that responsibility to a new agency. Bernanke told Dodd he thinks that's a bad idea. He pointed to the experience in Britain during the financial crisis where the Bank of England lost its power to examine banks years ago.

Mr. BERNANKE: When the crisis hit and, for example, when Northern Rock Bank came under stress, the Bank of England was completely in the dark and it was unable to address effectively what turn into a very disruptive run and a problem for the British economy.

YDSTIE: Dodd countered that under his plan, the Fed would be able to accompany the new regulators when they examine banks. Dodd and the Obama administration also want to strip the Fed of its consumer protection functions. So, even if Bernanke is confirmed, as appears likely, he could preside over a Fed would reduced powers during his second four years as chairman.

John Ydstie, NPR News, Washington.

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Bernanke Defends Record At Confirmation Hearing

Federal Reserve Chairman Ben Bernanke appears Thursday before the Senate Banking Committee. i
Jim Watson/AFP/Getty Images
Federal Reserve Chairman Ben Bernanke appears Thursday before the Senate Banking Committee.
Jim Watson/AFP/Getty Images

Federal Reserve Chairman Ben Bernanke, who has gained both allies and enemies over his handling of the financial crisis, told senators considering his renomination Thursday that he was committed to an "exit strategy" on bailouts and to stimulus programs that would provide a smooth return to normalcy.

Appearing before the Senate Banking Committee, the nation's head banker also said that if given a second term, he would work to "fundamentally reform" the system to prevent any repeat of the economic crisis — the worst since the 1930s.

"Determining the appropriate time and pace for the withdrawal of stimulus will require careful analysis and judgment," Bernanke said. "My colleagues on the Federal Open Market Committee and I are committed to implementing our exit strategy in a manner that both supports job creation and fosters continued price stability."

Heard On 'All Things Considered'

He added that 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, whose term expires Jan. 31, has been roundly criticized for the Federal Reserve's lax oversight and for failing to pick up on early signs of the housing and banking crises. Others have praised his aggressive actions that are widely credited with preventing the recession from becoming a full-blown depression.

But the government's bailout of Wall Street, even as ordinary Americans suffered, has become a point of deep contention. The multibillion-dollar bailouts of American International Group and other financial firms that continued to hand out huge bonuses sparked public furor and fueled worries that the Fed's moves would encourage "moral hazard," or risky behavior without fear of consequences. Even so, Bernanke's confirmation appears likely.

The Fed chief defended the financial industry bailout. He called Thursday's announcement by Bank of America that it would repay the government in full for the $45 billion it received under the Troubled Asset Relief Program good news.

In recovering TARP funds from other financial institutions, Bernanke said he believed that "overall we're going to end up with pretty close to break-even."

The committee chairman, Sen. Christopher Dodd (D-CT), praised the former Princeton University economics professor for having done "a very good job in preventing catastrophe."

The Fed's efforts "played, in my view, a very significant role in arresting the financial crisis," said Dodd, who predicted Bernanke would win another term.

But Dodd has pushed to limit the Fed's power, while the Fed chief has pushed for the central bank to retain strong control over monetary policy. Bernanke argued that the Fed must remain effective and independent to make sometimes politically unpopular decisions that are nonetheless good for the economy. On Wednesday, a House committee passed a provision that would subject the Fed to congressional audits. Bernanke opposes such a move.

The panel's top Republican, Sen. Richard Shelby of Alabama, said part of the problem with the Federal Reserve was that prior to the economic crisis, it "kept interest rates, I believe, far too low for too long, encouraging a housing bubble and excessive risk-taking."

In short, the Fed had done "a horrible job as a regulator," Shelby said.

"We didn't do a perfect job by any means," Bernanke acknowledged. But he added: "We didn't do the worst job" either.

In later questioning, Bernanke said he "did not anticipate a crisis of this magnitude."

"That is a mistake we won't make again," he added.

Sen. Bernie Sanders (I-VT), who is not a member of the Senate Banking Committee, said Wednesday that he planned to put a hold on the nomination when it reaches the Senate floor, arguing the Fed chief had done little for average Americans while going too easy on big banks. That move could force Senate leaders to round up 60 votes just to consider the nomination, which could slow the confirmation process.

Sanders' view was echoed by Sen. Jim Bunning (R-KY), who told Bernanke bluntly that "your time as Fed chairman has been a failure."

Pressed on whether the Fed would be in a position to rein in inflation as the federal deficit balloons, Bernanke reiterated that "we are thinking a great deal about our exit strategy." He said the current fiscal policy needed a similar exit strategy.

Entitlement programs also needed to be brought under control, Bernanke said, noting: "At the rate we're going, in 10 or 15 years, the budget will be nothing but entitlements."

Bernanke's testimony came on the same day that a private measure of U.S. service sector activity showed an unexpected drop for November and retailers posted a surprise drop in sales, as constrained consumer spending and rising unemployment hinder a broad recovery.

Meanwhile, new jobless claims dropped for a fifth straight week and third-quarter productivity gains suggest companies are finding ways to reap profits with fewer workers — another ominous sign for the nearly 16 million unemployed Americans.

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.

From NPR staff and wire reports

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