Federal Reserve Chairman Ben Bernanke employed his characteristic smoothness and conciliatory nature as he navigated the questioning at today’s confirmation hearing before the Senate Banking Committee, helped by the largely gentle questioning by Democrats on the committee.
Ironically, the most pointed progressive critique of Bernanke’s stewardship of the Fed did not come from any of the Democrats but from the far right.
Ultraconservative Sen. Jim Bunning, R-Ky., used his first opportunity to address Bernanke to run down the list of failures that took place under Bernanke’s watch, including his implementation of policies at the Fed that clearly signal that “just about every large bank, insurance company and even some industrial companies are too big to fail.”
His statement went on to say, “Rather than making management, shareholders and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.”
Bernanke’s hearing was preceded by the bold decision by Sen. Bernie Sanders, I-Vt., to place a hold on the renomination. Sanders said in a statement:
As head of the central bank since 2006, Bernanke could have demanded that Wall Street provide adequate credit to small and medium-sized businesses to create decent-paying jobs in a productive economy, but he did not. He could have insisted that large bailed-out banks end the usurious practice of charging interest rates of 30 percent or more on credit cards, but he did not. He could have broken up too-big-to-fail financial institutions that took Federal Reserve assistance, but he did not. He could have revealed which banks took more than $2 trillion in taxpayer-backed secret loans, but he did not.
At the same time, the Campaign for America’s Future and other progressive organizations forged an unlikely coalition with some of their ideological foes on the right, including conservatives Grover Norquist and Phyllis Schafly, and sent a letter to the Senate urging members not to confirm Bernanke before it commits to opening the Fed’s books. Such a provision already has overwhelmingly support in the House. The letter notes that during the financial crisis the Fed made loan commitments that exceed the size of the total federal budget, yet:
neither the public nor members of Congress has any information about who benefited from these loans, guarantees, and swap arrangements. There is no information available on the specific terms of the loans – the interest rate charged, the collateral posted, and whether or not they were repaid. There is no information available on how it was decided who would qualify for the Fed’s help and who would be denied assistance.
America’s Future co-director Robert Borosage said that “other Senators should be encouraged to join Sanders in demanding a full investigation before consideration of the Bernanke nomination.”
But Banking Committee chairman Christopher Dodd, D-Conn., set a disappointing tone to the hearings early by announcing, within the first five minutes, that “I will vote to support your nomination, because I believe that you are the right leader for this moment in our nation’s economic history and I think your reappointment sends the right signal to the markets.”
Dodd’s own opening statement detailed some of the reasons why Bernanke’s renomination should not be a done deal:
[F]or many years many of us in the Senate have been frustrated in our efforts to get the Fed to address predatory lending, and the Federal Reserve failed to develop meaningful mortgage regulations until after the housing bubble burst.
There have been other lapses in consumer protection, with the Fed doing little over the years to protect users of credit card and checking accounts from abusive company practices.
In addition, the Fed failed to rein in excessive risk-taking by some of the largest holding companies which it supervised. Many of the firms whose irresponsible actions contributed to the crisis and ultimately required a taxpayer-funded bailout did so under the Fed’s watch.
Dodd also asked a good question when he challenged Bernanke’s resistance to legislation that would reduce the Fed’s role in supervising the banking system by, for example, creating a new consumer watchdog agency. The toxic mix of a predator mentality and a casino atmosphere in the banking system that were at the root of the financial crisis would not have flourished as unchecked as it did if there had been effective cops on the beat. And since the Fed was that cop, why should the Fed continue to be entrusted with that role?
Bernanke’s answer was that the Fed has “unparalleled expertise” in banking—unsaid, by the way, is that expertise is largely derived from the intimate links between the Fed and the banking industry—and that it should be given a chance to put that expertise to better use.
It was Sen. Tim Johnson who first questioned Bernanke on the critical issue of Fed transparency, albeit from the standpoint of a senator who, like Dodd, went into the hearing already determined to support Bernanke’s renomination. In response to Johnson’s question about whether the Fed’s monetary actions should be subject to an audit, Bernanke argued that already “we are in fact very transparent in our financial dealings,” from disclosure of Fed minutes to GAO audits of non-monetary policy actions. But Bernanke argued that Congress could use its auditing power in the wake of an unpopular Fed decision to look at policy manuals, interview staff “and to basically second-guess the Fed’s actions in very short order.” That, he said, would undermine the Fed’s independence and rattle financial markets.
A good follow-up question, sadly unasked, would have been, “What about rattled Main Street families, who see the sharp rise in the deficit that was driven in part by Fed policy decisions, and the trillions in off-budget liabilities that taxpayers are exposed to as a result of Fed commitments, and wonder if the government will be able to afford a whole range of responsibilities, from health care reform to defense spending? Don’t they deserve to know how their tax dollars are being used to prop up the financial sector, and what, if anything, was demanded of the financial sector in return?”
Bunning said that “the AIG bailout alone is reason enough to send you back to Princeton,” noting that Bernanke’s actions made whole the insurance company’s counterparties that were engaged in credit default swaps with AIG. “I can think of only two possible reasons why you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up UBS (one of the countrparties) on their offer of a haircut. Sadley, these two reasons are incompetence or a desire to secretly funnel money to a few select firms, most notably Goldman Sachs, Merill Lynch and a handful of large European banks.”
Either of those conclusions may be over the top, but the point is that we don’t know. An independent audit would settle that question. It is essential that the Senate get past the bogeyman of compromised Fed independence that Bernanke has raised and insist that there is a process for getting these questions answered.
To push the Senate in that direction, sign the Progressive Change Campaign Committee petition thanking Sanders for “standing up to Wall Street and putting a ‘hold’ on Ben Bernanke.”