Posted on Wed, Jul. 22, 2009
last updated: July 22, 2009 06:20:33 PM
WASHINGTON — In his second day in the congressional hot seat, Federal Reserve Chairman Ben Bernanke on Wednesday resisted calls for an audit of the independent central bank, dodged taking sides in the raging health care debate, unveiled changes to mortgage lending and warned against too much economic optimism.
With unemployment stubbornly high and consumers on the defensive, a return to healthy growth remains distant for the U.S. economy, Bernanke told members of the Senate Banking Committee in semiannual testimony.
"We expect the recovery to start off relatively slow and it is, in part, because of the consumer who is facing a damaged balance sheet, still has high debt on the balance sheet, wealth has been reduced in housing and equity price declines," the Fed chairman said. "So we don't expect the consumer to come roaring back by any means, particularly with the labor market in the position that it is in."
The unemployment rate stands at 9.5 percent and is expected to top 10 percent this year. Fifteen states already have hit or exceeded the 10 percent mark. Most economists don't see a significant decline in the jobless rate until the middle of next year, and that's bad for consumption, which in recent years has driven about two-thirds of U.S. economic activity.
Bernanke said he stuck to his earlier forecast that the U.S. economy should begin growing late this year, "but it depends very much on the extent that consumers can get comfortable with their financial situation going forward, and also the evolution of the labor market."
Another factor will be finding a bottom on home prices, so that a vital sector returns to health.
"The recent data have been mildly encouraging," Bernanke said, adding that housing affordability rarely has been better. However, new foreclosures coming onto the market keep putting downward pressure on home prices, he said, and as the jobless rate increases foreclosures are picking up speed, slowing recovery.
The Fed chief said he'd unveil important new rules Thursday on mortgage lending. They'll require lenders to disclose to borrowers clearly — using actual numbers instead of examples — what their loan costs would be.
There also will be a ban on yield spread premiums, kickback-like bonuses that lenders paid mortgage brokers if the brokers were able to get borrowers into mortgages with higher lending rates than the ones for which the borrowers qualified. These premiums gave incentives for brokers, who had no financial responsibility to borrowers, to push costlier mortgages.
"The purpose of the regulation would be ... to provide no incentive for brokers to steer borrowers into inappropriate high-cost mortgages," Bernanke said.
Sen. Jeff Merkley, D-Ore., responded that "if that is accomplished it is a very important consumer reform."
A day earlier, members of the House Financial Services Committee had roughed up Bernanke over government bailout programs and pressed him on concerns that inflation looms. Wednesday, Republican senators repeatedly tried to pin Bernanke down on President Barack Obama's proposed revamp of the health care system, trying to have him echo concerns by the nonpartisan Congressional Budget Office that it would add to the growing government budget deficits.
The Fed chief bobbed and weaved in his answers, hoping to stay out of the debate. However, he repeated numerous times that containing the rising costs of health care, which isn't Obama's main focus, is essential to getting government finances in order and relieving the cost burden on employers and consumers.
With his term as chairman expiring next Jan. 31 and Obama unwilling to commit to reappointing him, Bernanke, a Republican, is increasingly under a microscope. He's been criticized for recognizing the gathering financial crisis too late but praised for bold, even innovative approaches to preventing a global financial collapse.
The Obama administration's revamp proposals for financial regulation, the latest coming late Wednesday, would give the Fed greater powers to police the U.S. financial system.
However, some in Congress want more scrutiny of the largely secretive independent body itself. Sen. David Vitter, R-La., co-authored legislation that would give the Government Accountability Office the authority to audit the Fed, something that Bernanke thinks threatens his independence.
"The GAO audits really involve an assessment of policy itself, and the decision process," the Fed chief said, adding that it would require government investigators to interview members of the interest rate-setting Federal Open Market Committee and even to obtain sworn deposition from outside experts. "It just seems to me that is more intervention than is consistent with practice around the world, that central banks operate on monetary policy independently ... of congressional intervention."
Bernanke added that such audits open the door to politicizing about Fed policy.
"I'm just concerned about what might look like an attempt on Congress' part to, even if indirectly, send a message, if you will, to the FOMC to take a different action than it thinks is in the long-run interest of the economy," he said.
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