WASHINGTON — Making a case for his confirmation to a second term as the chairman of the Federal Reserve, Ben Bernanke on Thursday defended unpopular actions he's taken that helped stem a spreading global financial crisis, and he offered a mea culpa for the Fed's failure to see the storm coming.
Bernanke faced tough questions from members of the Senate Banking Committee, which must decide whether he gets another four-year term as the chairman of the independent central bank.
In an opening statement, Bernanke said that the financial crisis would've been "markedly worse" but for the actions of the Fed and the $700 billion taxpayer bailout of the financial sector that Congress passed last fall.
Under questioning later, he acknowledged that the Fed was slow to recognize the threat that problems in mortgage finance presented to the broader financial system. Bernanke said that the Fed had failed to monitor sufficiently the risks that large financial firms were taking, a failure that had grave consequences for average Americans, who now are struggling with an unemployment rate that's at 10.2 percent and probably heading higher.
A Republican, Bernanke was first nominated by President George W. Bush in October 2005 and confirmed in January 2006. Today it's the Republican Party that's most hostile to President Barack Obama's nominee for a second term.
The harshest criticism came from Sen. Jim Bunning, R-Ky., who voted against Bernanke for his first term on the grounds that his policies were indistinguishable from those of his predecessor, Alan Greenspan.
"Your time as Fed chairman has been a failure," Bunning said. "I will do everything I can to stop your nomination and drag out this process as long as I can."
Sen. Bernard Sanders, a Vermont independent, issued a statement Wednesday night saying that he'd put a "hold" on Bernanke's confirmation, a procedural move that allows a lone senator to gum up Senate action. His stand may require a super-majority of 60 votes in the 100-member Senate to achieve Bernanke's confirmation.
"The American people want a new direction on Wall Street and at the Fed. They do not want as chairman someone who has been part of the problem and who has been responsible for many of the enormous difficulties that we are now experiencing," Sanders said. "It's time for a change at the Fed."
Other critics, such as Sen. Richard Shelby of Alabama, the panel's senior Republican, point to transcripts of the closed-door Federal Open Market Committee meetings, where interest rate policies are determined. Recently declassified transcripts show that Bernanke, as a Fed governor, was a principal voice for keeping interest rates unusually low in the years after the Sept. 11, 2001, terrorist attacks.
Those low interest rates, economists now conclude, contributed to an era of cheap money that helped fuel an unsustainable rise in home prices and a period in which consumers, businesses and financial firms overextended themselves with massive debt.
Under hostile questioning by Bunning, Bernanke maintained that regulatory problems in the mortgage markets were to blame for the housing bubble, not the Fed's monetary policy.
The extended period of cheap money — much of it during a time when Shelby was the chairman of the Banking Committee_ has besmirched the infallible image of the Fed, Shelby said.
"I fear now that our trust and confidence were misplaced in many instances," said Shelby, stopping short of saying that he wouldn't vote for Bernanke.
In a hostile lead editorial Thursday, editorial writers at The Wall Street Journal said that Bernanke's actions during the crisis, however laudable, didn't justify his remaining as the Fed chairman.
"We nonetheless think someone should say that, as a matter of accountability for the financial crisis and looking at the hard monetary choices to come, the country needs a new Fed chief," the newspaper said.
Democrats largely rallied behind Bernanke, a quiet bearded man whose career before the Fed was as a Princeton University professor widely recognized as the world's leading expert on the Great Depression.
"Under your leadership, Mr. Chairman, the Federal Reserve has taken extraordinary actions. ... These efforts, in my view, have played a very significant role in arresting the financial crisis," said committee Chairman Christopher Dodd, D-Conn. "I believe that you deserve another term as chairman of the Federal Reserve. ... I believe you are the right leader at this moment in our nation's economic history."
Democrats and Republicans alike were highly critical of the Fed's decision during the September 2008 rescue of insurer American International Group to pay off creditors at full value without negotiation. McClatchy first reported this last April, but it got attention from Congress only last month, when a special inspector general's report on the use of taxpayer bailout money highlighted it.
Bernanke said Thursday that since AIG wasn't in bankruptcy, the Fed didn't have the power to demand so-called haircuts, in which creditors are paid off at less than face value.
On other matters, Bernanke:
_Said the Fed shouldn't be stripped of its bank supervisory powers, as Dodd proposes, because that would go in the opposite direction of trends around the world, in which central banks serve as lead bank regulators.
_ Maintained that low interest rates aren't fueling bubbles in the prices of oil and other commodities. "We do not see at this point any extreme misevaluation of assets in the United States," he said, shrugging off that possibility elsewhere. "It's really not the responsibility of the United States to ... make sure that there are not misalignments everywhere in the world."
_ Didn't expect a return to 1970s-style inflation as the U.S. crisis ebbs, but cautioned that interest rates could rise for other reasons, such as tougher lending standards by banks. "We might not be able to stop increases in real interest rates even at a stable price level," he warned.
_ Repeated that Congress, not the Fed, must decide whether tax hikes to lower the federal budget deficit or tax cuts to spark economic activity are needed. "I've done my best to leave that authority where it belongs," the Fed chairman said.
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