When an army loses a battle, it doesn’t mean that army should be dismantled, Ben Bernanke said Thursday in defending his tenure as Federal Reserve chairman in the period leading up to the recent financial crisis.
Bernanke is hoping to convince Congress to reappoint him to a second term amid growing public anger tied to the perception that government bent over backwards to bail out Wall Street while average Americans were hung out to dry.
Bernanke was quick to note that many of the Fed’s policies are working, pointing to Wednesday’s announcement that Bank of America (BAC) will immediately pay back $45 billion funneled to it by the U.S. Treasury to keep it afloat during the darkest days of the recent credit crisis.
Bernanke is virtually assured to be reappointed, but the questioning Thursday by members of the Senate Banking Committee during his confirmation hearing was anything but friendly.
Typical were comments by Sen. Jack Reed, (D-R.I.). A decade ago, the U.S. was operating with a budget surplus and unemployment was below 5%, Reed noted. The U.S. is now facing a $1.4 trillion dollar deficit and unemployment is over 10%.
“What happened?” Reed asked.
Bernanke suggested that the recent economic downturn was beyond the control of any single government entity. However, he conceded that the Fed must review its role in mishandling the economy such that the collapse of the U.S. housing market that nearly toppled global financial markets.
"A financial crisis of the severity we have experienced must prompt financial institutions and regulators alike to undertake unsparing self-assessment of their past performance," the Fed chief said in prepared comment.
Bernanke, 55, urged Congress to continue the Fed’s current policies for pulling the U.S. out of the economic slump.
"It would be a tragedy if, after all the hardships that Americans have endured during the past two years, our nation failed to take the steps necessary to prevent a recurrence of a crisis of the magnitude we have recently confronted," Bernanke said.
Sen. Christopher Dodd, D-Conn., chairman of the panel, predicted Bernanke would win confirmation. “Under your leadership, the Fed has taken extraordinary actions to right the economy,” said Dodd, who wants to limit the Fed's powers. “These efforts played, in my view, a very significant role in arresting the financial crisis.”
Dodd and others drew a distinction between Bernanke's leadership and the operations of the Fed as an institution itself.
At least one senator was scathing in his review of Bernanke's first term. “In short, you are the definition of a moral hazard,” said Sen. Jim Bunning, R- Ky., during a long and pointed excoriation of the Fed chairman.
“I will do everything I can to stop your nomination,” said Bunning
Bernanke said the Fed stands ready -- when the time is right -- to reverse course and start boosting interest rates to prevent inflation from flaring up. As part of that process, the Fed would need to soak up the unprecedented amount of money -- trillions of dollars -- it poured into the economy during the crisis.
"We are confident that we have the necessary tools to do so," Bernanke said. He didn't say when the Fed would start raising rates, although private economists think that will happen late next year.
The central bank's forceful and aggressive actions prevented the devastating crisis from getting even worse, Bernanke said. For instance, he coordinated emergency relief actions with central banks overseas and slashed a key lending rate to a record low, near zero.
Those steps -- along with a $787 billion stimulus package -- eventually helped pull the country out of recession. The economy has now entered a fragile recovery.
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