Politics & Government

Senators slam Bernanke, then confirm him to second term

Federal Reserve Chairman Ben Bernanke.
Federal Reserve Chairman Ben Bernanke. Chuck Kennedy / MCT

WASHINGTON — The U.S. Senate confirmed Federal Reserve Board Chairman Ben Bernanke to a second four-year term on Thursday, but not before lawmakers from both parties skewered him for his performance as a steward of the economy and the banking system.

The 70-30 vote came amid growing criticism of the Federal Reserve for secrecy and controversial decisions made during the $182 billion rescue of troubled insurance giant American International Group.

Ahead of the vote, Bernanke agreed to an unprecedented audit of the Fed's handling of AIG matters by the Government Accountability Office, the watchdog arm of Congress. That's only one of a number of challenges he faces in his second term directing the nation's central bank.

To his supporters, the quiet, professorial Fed chairman, a former Princeton economist, saved the global financial system from ruin over the past two years. His detractors called him complicit in the worst economic downturn since the Great Depression.

"Bernanke fiddled while our markets burned," Sen. Richard Shelby, R-Ala., the Senate Banking Committee's top Republican, said before his "no" vote.

Complaints were bipartisan.

"The American people have the right to ask whether the Fed is truly committed to supporting Main Street's economy, not just Wall Street," said Sen. Barbara Boxer, D-Calif. "And that is why I cannot support his reappointment."

Bernanke's nomination appeared shaky last week, but a strong push by the White House and Senate Democratic leaders — with solid support from most Republicans — quickly doused the political brushfire. His first term expires Sunday.

Still, the debate on the 56-year-old chairman's fate erupted into a clash over who's responsible — or will become a scapegoat — for the financial crisis.

With Bernanke's confirmation, pressure may grow on President Barack Obama to ease out Treasury Secretary Timothy Geithner or White House economic adviser Lawrence Summers, both of whom are faulted for being too close to Wall Street.

Supporters argued that Bernanke, an academic expert on the Great Depression, courageously took unprecedented steps to prevent its sequel.

"There is consensus that Mr. Bernanke kept the nation out of a Depression and has kept inflation in check," said Sen. Tim Johnson, D-S.D. "There is no doubt that having one of the world's foremost experts on the Great Depression at the helm of the Fed is a benefit to the nation."

Sen. Charles Schumer, D-N.Y., said that Bernanke's creative steps — such as broadening the universe of institutions that could receive Fed support and lending directly to big corporations that needed to roll over short-term debt — brought the economy back from the edge of an abyss.

"Nobody was more important in preventing the collapse . . . than Chairman Bernanke. I was there in the meetings, and I saw his steady hand," Schumer said.

For many, however — 18 Republicans, 11 Democrats and one independent — Bernanke simply corrected errors of his own making as a Fed governor from 2002-2005, and later as President George W. Bush's chairman of the Council of Economic Advisers in 2005-2006. Bush appointed him Fed chairman in 2006.

These errors, they said, included failing to use the Fed's powers to curb shoddy mortgage lending, such as no-documentation loans and mortgages with low teaser rates that later exploded into higher, unaffordable monthly payments.

"As the economy started to slide and the housing bubble peaked and then burst, Chairman Bernanke failed to notice the problems or do anything about them until it was too late," said Sen. Jim Bunning, R-Ky. "During that time, he made statements showing just how he did not understand what was really going on in the economy or how severe the crash would be."

Shortly after Bernanke took the Fed's helm, problems in subprime loans given to borrowers with the weakest credit undermined the housing market and eventually caused the entire financial system to crater in September 2008.

Bernanke was instrumental in convincing Congress to pass a $700 billion rescue of the financial system. He also used the Fed's resources in creative ways to sustain lending in the economy as global credit markets seized up. His efforts helped stem the panic, but another of his predecessors, Paul Volcker, questioned whether Bernanke had the authority to do much of what he'd done.

The lack of clear rules meant that steps taken by Bernanke's Fed are now being second-guessed. Numerous congressional committees are examining how the Fed decided to help different Wall Street firms, and one panel has issued subpoenas. A pending bill to overhaul financial regulation includes a full independent audit of Fed activities, something never done before.

Beyond those headaches, Bernanke in his second term must take care in unwinding massive purchases of complex securities, steps taken to shore up the housing market and restore consumer lending. These purchases have swelled the Fed's balance sheet to almost $2.3 trillion, and some analysts warn that this is akin to printing money and could spark inflation once the recession subsides.

If inflation flares, Bernanke may face an unpleasant choice between increasing interest rates to quell inflation, which would slow the recovery, or tolerating rising inflation and angering creditors who'll see the value of their investments erode.

"It's not an enviable position," said Michael Williams, dean of Touro College graduate business school in New York, who says that Bernanke is blamed for problems created before his tenure. "When politicians say that this happened on his watch, it's complete garbage."


To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Planet Washington

Geithner, predecessor and Fed defend AIG payments

Senate approves tough new spending curbs without GOP

Analysis: Obama channels Reagan, 'Stay the course'