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Bernanke confirmation hearing likely to be contentious

Though the Fed chairman is favored to win a second term, he'll first have to face lawmakers angry over his handling of the financial crisis and ready to rein in the central bank's powers.

December 03, 2009|By Don Lee
  • Fed Chairman Ben Bernanke, right, talks with predecessor Paul Volcker during an Economic Club of New York luncheon last month.
Fed Chairman Ben Bernanke, right, talks with predecessor Paul Volcker… (Daniel Acker / Bloomberg )

Reporting from Washington — Federal Reserve Chairman Ben S. Bernanke may be heavily favored to win Senate confirmation for a second term, but he faces a far tougher challenge in trying to beat back efforts by angry lawmakers to curb the Fed's independence as an arbiter of economic policy.

The anger, which is likely to boil up today at Bernanke's confirmation hearing, arises from the Fed's widely acknowledged failure to curb the excessive risk-taking and other financial behavior that helped precipitate the worst economic crisis since the Great Depression.

Reflecting the antagonism Bernanke faces in Congress, Sen. Bernie Sanders of Vermont placed a hold on the Fed chief's nomination late Wednesday.

The move by Sanders, an independent who caucuses with the Senate's Democrats, isn't expected to derail Bernanke's confirmation.

Posing more of a threat is an increasingly powerful effort to subject the Fed to congressional audits and other supervision. That campaign has raised concern among economists and some policymakers that global confidence could be shaken if foreign investors fear the U.S. central bank will be subject to the shifting winds of domestic politics.

Over the last two decades, politicians around the globe have tended to take a more hands-off approach toward central banks as evidence has mounted that doing so produces lower levels of inflation.

"All the evidence points to the fact that decreasing independence and meddling in monetary policy by politicians are likely to create inflation," said Alex Cukierman, an economics professor at Tel Aviv University who has done extensive research on central banks. "Politicians are, after all, advocates. There is a bias to expand the economy."

Now is a particularly bad time to take steps that raise questions about the credibility of the Fed as a bulwark against inflation, said Ethan Harris, a former research officer at the Federal Reserve Bank of New York and author of "Ben Bernanke's Fed."

"We're already in a situation where we're dependent on the kindness of strangers," Harris said, referring to the large debts owed by the United States to China and other foreign governments. "It's not a way to inspire foreign investor confidence."

China and other countries hold billions of dollars in Treasury bills, primarily because those countries have considered the U.S. government securities more stable and secure than other forms of investment. In recent months, however, Chinese and European officials have raised the prospect of shifting to other investments -- a move that could raise the U.S. government's already hefty interest costs.

Economists in China have been keenly following the debate over the Fed's autonomy, said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, Research Center for International Reform.

"Their policy will have a huge impact on China's holdings," he said.

Bernanke has waged an unprecedented public campaign for a second term, including a rare television interview, a town-hall-style forum and opinion articles in newspapers. Privately, he has pressed his case in individual meetings with dozens of members of Congress.

But such efforts have been offset by continuing double-digit unemployment and public outcries over government bailouts of major banks and other entities deemed "too big to fail," as well as resentment over multimillion-dollar bonuses being paid to top executives of foundering companies that took federal bailout money.

On Wednesday a House committee passed a regulatory overhaul bill that would broaden congressional oversight of the Fed, including scrutinizing the institution's monetary policy decisions on setting interest rates.

A similar measure, with 30 bipartisan cosponsors, awaits action in the Senate.

What's more, under a proposal by Sen. Christopher Dodd (D-Conn.), not only would the Fed be stripped of much of its regulatory powers, but also the appointment of regional Fed bank heads, long an internal matter, would require Senate confirmation.

Dodd, chairman of the Senate Banking Committee, has called the Fed an "abysmal failure" as a regulator, although he has spoken more favorably of Bernanke's performance. Along with a majority of the committee's members, Dodd appears likely to support a second four-year term as chairman.

Although known primarily for managing the nation's money supply by raising or lowering interest rates, the Fed has broad authority to make loans and supervise banking institutions. The central bank also holds emergency powers, which weren't exercised until the recent financial crisis, to bail out firms whose failure could threaten the larger financial system.

In 1978, Congress passed legislation allowing the Government Accountability Office, an investigative arm of Congress, to audit the Fed's operations. But the measure specifically barred oversight of monetary policy proceedings and a number of other transactions.

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