Under fire from Democrats and Republicans alike, Ben S. Bernanke PhD ’79 on Thursday defended his record as chairman of the Federal Reserve but conceded that the central bank’s lapses contributed to the financial crisis.
“I did not anticipate a crisis of this magnitude,” Bernanke acknowledged in an occasionally contentious hearing on his nomination for a second term as Fed chairman.
Bernanke volunteered that the Fed had been “slow” in protecting consumers from high-risk mortgages during the housing bubble and that it should have forced banks to hold more capital for all the risks they were taking on.
“In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”
As he faced the Senate banking committee on Thursday morning, Bernanke still seemed to have enough support to win approval for a second term. But he and the Fed as an institution came under withering criticism for failing to recognize the crisis until it was too late and then bailing out financial giants like Citigroup and the American International Group.
The hearing provided new evidence of doubt among lawmakers about the Federal Reserve’s role as the nation’s guardian of the financial system.
“In the face of rising home prices and risky mortgage underwriting, the Fed failed to act,” said Sen. Richard C. Shelby of Alabama, the senior Republican on the banking committee. “Many of the Fed’s responses, in my view, greatly amplified the problem of moral hazard stemming from ‘too big to fail’ treatment of large financial institutions and activities.”
At the end of the hearing, Shelby signaled his agreement with the committee’s Democratic chairman, Sen. Christopher J. Dodd of Connecticut, that the Fed should give up a large measure of its authority as a financial regulator.
Dodd, who strongly endorsed Bernanke for a second term as Fed chairman, has proposed that the Fed’s powers as a bank regulator ought to be transferred to a new consolidated agency.
Bernanke and other top Fed officials adamantly oppose that idea, arguing that the Fed has unique expertise and that its ability to preserve financial stability depends on having the detailed information that only a regulator has about the inner workings of major institutions.
The debate is just beginning, and it is unclear whether Shelby and other Republicans even want to team up with Democrats on an overhaul of financial regulation. Democrats on the committee are divided. Sen. Evan Bayh, D-Ind., made it clear that he wanted the Fed to remain a bank regulator.
Meanwhile, Bernanke and the Fed came under more populist attacks from lawmakers in both parties.
On Tuesday, Sen. Bernard Sanders of Vermont declared that he would try to block Bernanke’s approval on the Senate floor by placing a hold on his nomination. Senate leaders would need 60 votes, rather than a simple majority, to override the hold.
And Sen. Jim Bunning, a Kentucky Republican who was the only person to vote against Bernanke’s original appointment as chairman in 2006, vowed on Wednesday to “do everything I can to stop your nomination and drag this out as long as I can.”