By Neil Irwin
Washington Post Staff Writer
Friday, December 4, 2009
Ben S. Bernanke got a glimpse Thursday of the competing demands he would face in a second term as Federal Reserve chairman during four hours of tough questions, with some senators urging him to do more to resuscitate the economy while others pressed him to roll back efforts before they provoke a vicious bout of inflation.
Members of the Senate banking committee, who were weighing whether to give him four more years as the nation's top economic policymaker, chided Bernanke, citing the highest unemployment rate in a generation and continuing reluctance of banks to stimulate economic activity by lending to businesses. At the same time, he drew fire from senators who faulted the Fed's efforts to prop up the economy as ill-conceived and who warned that the central bank could see inflation return if it doesn't soon reverse its aggressive measures to stimulate growth, such as a policy of ultra-low interest rates.
That inherent tension is likely to define Bernanke's second term as Fed chairman if, as appeared likely at the hearing, he is confirmed by the full Senate. Bernanke received ample criticism, particularly for the Fed's regulatory failures in the run-up to the financial crisis and its decisions during the bailout of American International Group. But the consensus on the banking committee was that Bernanke's actions during the crisis helped avert a much worse fate for the economy.
"I strongly support your confirmation," said Sen. Christopher J. Dodd (D-Conn.), chairman of the committee. "I believe you're the right person at the right time to do this job." Dodd offered his endorsement even though he has sharply criticized the Fed, including at the hearing.
Sen. Bernard Sanders (I-Vt.) said Wednesday that he will place a hold on Bernanke's nomination, a parliamentary maneuver that could delay a confirmation vote into next month and make it necessary for the Senate leadership to muster 60 votes in his favor, rather than the usual 51-vote majority. Although Sanders is not on the banking committee, another vehement critic, Sen. Jim Bunning (R-Ky.), is a member and he pledged to Bernanke that he would "do everything I can to stop your nomination and drag out this process as long as I can."
But the prevailing view on the committee was more sympathetic as Republicans Bob Corker (R-Tenn.) and Judd Gregg (R-N.H.) joined with several Democrats in offering Bernanke praise. Bernanke was initially appointed during the Republican administration of George W. Bush and was renominated by Democratic President Obama.
Bernanke maintained an even tone during the session, defending the Fed's -- and his own -- actions without becoming flustered or argumentative. When Bunning opened with a scathing 1,600-word attack on Bernanke's leadership of the Fed -- "In short, you are the definition of a moral hazard," Bunning scolded -- Bernanke responded with a narrow discussion of how the Fed negotiated with AIG counterparties when it was taking over the firm.
While there was plenty of criticism directed at past Fed actions, the discussion laid bare the challenges facing the central bank over the coming years. Unemployment is 10.2 percent and climbing, and Fed officials forecast it to remain elevated for years to come. That will intensify pressure on Bernanke to combat the anemic job market.
"What do we do about it?" Sen. Jack Reed (D-R.I.) asked him. "What would you propose to do about the employment situation?"
"What can the Fed do to move [bank lending] in a direction that also is going to begin to make a real significant impact on unemployment?" asked Sen. Robert Menendez (D-N.J.).
Bernanke's response was to cite the Fed's policy of keeping its target interest rate near zero, and to note "mortgage-backed securities purchases and a variety of other things," referring to the Fed's record of buying $1.25 trillion in mortgage securities with the aim of keeping rates low for home purchases.
But he also faced questions from senators who were apprehensive that those very efforts will cause a burst of inflation.
"If we confirm you, that's going to be on your plate, maybe not in the next six to 12 months, but certainly during your four-year term," said Sen. Robert F. Bennett (R-Utah). "Is inflation going to come back?"
Sen. Richard C. Shelby (Ala.), the ranking Republican on the panel, raised concerns about the $2 trillion in assets the Fed now owns, a total that has ballooned with the purchase of mortgage securities and other unconventional efforts to buttress the economy.
Bernanke talked as tough about inflation as he did about unemployment.
"Inflation is very corrosive," he said. "It's very bad for the economy. And I just want to reiterate that the Fed has a strong commitment to price stability, and we will maintain that commitment."
The Fed chairman also used the occasion to push back against a bill, introduced by Rep. Ron Paul (R-Tex.) and endorsed by the House Financial Services Committee, to subject Fed decisions about monetary policy to audits by the Government Accountability Office. Bernanke has argued repeatedly that such a move would undermine the Fed's ability to take unpopular but necessary actions, for instance raising interest rates, and compromise the central bank's independence.
While the measure has been co-sponsored by a majority of members of the House, a bipartisan group of senators on the committee was clearly sympathetic to Bernanke's view.
"The last thing that we want is the political branches of government getting more involved in setting these policies on a day-to-day basis," said Sen. Evan Bayh (D-Ind.).