Bernanke says Fed can take on supercop role

By JEANNINE AVERSA, AP Economics Writer

Tuesday, July 21, 2009

(07-21) 12:35 PDT WASHINGTON, (AP) --

Federal Reserve Chairman Ben Bernanke ran into skepticism Tuesday from lawmakers wary of expanding the Fed's duties to police big financial companies. They argued that the Fed failed to spot problems that led to the financial crisis in the first place.

"The Fed has made some big mistakes," said Rep. Spencer Bachus, R-Ala., ranking member of the House Financial Services Committee.

An Obama administration proposal to make the Fed the supercop of globally interconnected financial companies would be "just inviting a false sense of security that inevitably will be shattered at the expense of the taxpayer," Bachus warned.

Bernanke countered that the administration's proposal would be a "modest reorientation" of the Fed's powers, not a great expansion of them.

The Fed boss sought to assure investors and Congress that the central bank will be able to reel in its extraordinary economic stimulus and prevent a flare up of inflation once a recovery is firmly rooted. Still, any such steps will be far off in the future. The central bank's focus remains "fostering economic recovery," he said.

Bernanke also worked to beat back an administration proposal to create a new consumer protection regulator for financial services and strip some of those duties from the central bank. The House panel delayed a committee vote on that legislation until September.

Consumer groups and lawmakers have blamed the Fed for failing to crack down early on dubious mortgages practices that fed the housing boom and figured into its collapse. Later this week, the Fed will issue a proposal to boost disclosures on mortgages and home equity lines of credit. It also will include new rules governing the compensation of mortgage originators.

Bernanke also argued against congressional proposals to let the Government Accountability Office, Congress' investigative arm, audit the central bank. He feared that audits that delve into the Fed's interest-rate decisions could compromise its independence in setting interest-rate policies.

"A perceived loss of monetary policy independence could raise fears about future inflation," he warned.

Rep. Ron Paul, R-Texas, a frequent Fed critic, rejected that argument and said the Fed already makes political calculations.

"Just the fact that (the Fed) can issue a lot of loans and special privileges to banks and corporations," Paul said. "That's political."

Rep. Bill Posey, R-Fla., who wants the Fed to be more open, argued that some people rightly say "you can find out more about the operations of the CIA, than the Fed. The public has the right to know."

Bernanke's term expires early next year, and President Barack Obama will have to decide whether to reappoint him. The Fed chief's innovative policies have been credited with pulling the economy from the edge of the abyss last year.

But those actions also have touched off criticism about putting taxpayers at risk and whether the government should be cleaning up Wall Street messes.

Bernanke again pledged to keep its key bank lending rate at a record low near zero for an "extended period." Economists predict rates will stay at record lows through the rest of this year.

Laying out a plan now to unwind the Fed's stimulus could give Bernanke more leeway to hold rates at record lows to brace the economy. It could ease investors' fears that the Fed's aggressive steps to end the longest recession since World War II could spur inflation later on.

"It is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation," Bernanke said. "We are confident that we have the necessary tools to implement that strategy when appropriate."

But House committee chairman Barney Frank, D-Mass., said it is important that the Fed not take those actions "prematurely" and snuff out a recovery.

Nigel Gault, economist at IHS Global Insight, said Bernanke wanted to send Congress a clear message: "Our monetary exit strategy is ready. Don't try to interfere with it."

On Wall Street, bond investors took comfort in Bernanke's remarks, pushing Treasury prices higher. The Dow Jones industrial average added about 35 points in afternoon trading, while broader indices dipped.

To revive the economy, the Fed has plowed trillions into the financial system in an effort to drive down rates on mortgages and other consumer debt. It also has created programs to bust through credit clogs, a key ingredient in turning the economy around.

Eventually, the Fed will need to soak up that money.

Besides raising its key bank lending rate, the Fed can raise the rate it pays banks on reserve balances held at the central bank, Bernanke said. That would give banks an incentive to keep their money parked there, rather having it flow back into the economy, where it can stoke inflationary pressures.

The Fed also can drain money from the financial system by selling securities from its portfolio with an agreement to buy them back at a later date. Or it can sell securities outright.

Steering the economy from recession to recovery will be a delicate move for Bernanke — economically and politically.

Bernanke repeated the Fed's forecast that the economy should start growing again in the second half of this year. But he warned that growth would be slight, leading to higher unemployment.

The nation's unemployment rate climbed to a 26-year high of 9.5 percent in June. The Fed says it could rise as high as 10.1 percent this year and stay elevated into 2011. The post-World War II high was 10.8 percent at the end of 1982.

"We have a very long haul" back to full economic health, Bernanke told lawmakers.

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Comment by 7R33SandR0P3S on July 21, 2009 at 7:59pm

Tell Nancy Pelosi to schedule debate and a roll call vote on Auditing the Fed
Petition to Speaker of the House Nancy Pelosi

The Federal Reserve refuses to give a public accounting of the TRILLIONS in recent taxpayer-backed loans; and
Congress has the responsibility to force a public audit of the Federal Reserve, and the American people deserve to know how our tax dollars are being spent; and
Allowing the Fed to remain out of control and shrouded in secrecy clearly allows for abuse and the continued stealing of our tax dollars through inflation and unaccounted electronic bank "loans"; and
The Federal Reserve's abuses lead to economic crises like the current housing crisis, international banking crisis, and the resulting chaos; and
The Federal Reserve System forces fuel, food, housing, medical care, and education costs upward, meaning that everyone who is NOT on the government dole is forced to make do with less as the value of money slowly decreases; and
Congress has allowed the Federal Reserve to operate without sufficient oversight for too long;
Therefore: I urge you to schedule debate and a roll call vote on Ron Paul's Audit the Fed Bill, H.R. 1207.

Comment by Maas on July 21, 2009 at 7:24pm
How is it possible that no other members of Congress besides Paul and Kuccinich admit to the FED being basically a criminal mafia?
Comment by 7R33SandR0P3S on July 21, 2009 at 7:10pm
Well, we know that the FED, Treasury & Bankers own Usurper Husein's teleprompter.
They also own Barney Fudd and Nazi Pelosi.

Update - HR 1207 - 275 Co-sponsors!! 15 away from veto proof

Update: S 604 "Sunshine Act" has 17 co-sponsors - Contact your Senator

Representative and Speaker of the House
Sponsored by:

"Destroying the New World Order"


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