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Bernanke back in hot seat on Capitol Hill

Jeannine Aversa
AP Economics Writer

Washington — Federal Reserve Chairman Ben Bernanke ran into more tough questions Wednesday on Capitol Hill about the central bank’s extraordinary actions to rescue the economy and its ability to take on even more responsibility.

Bernanke spoke before the Senate Banking Committee, one day after waging a defense of the Fed’s actions before House lawmakers.

Last year’s taxpayer-financed rescues of insurance giant American International Group and others outraged many ordinary Americans and some lawmakers.

“Why does the Fed deserve more authority” when it failed to spot the current financial crisis before it struck? wondered Sen. Christopher Dodd, D-Conn., chairman of the committee.

Sen. Richard Shelby, R-Ala., raised the same concerns about an Obama administration proposal that would expand the Fed’s duties to police globally interconnected financial firms whose collapse could imperil the entire U.S. economy.

“It was the failure, I believe, of the Fed to adequately supervise” that contributed to the financial meltdown, said Shelby, the committee’s senior Republican.

The Fed chief insisted that the central bank’s role under the administration proposal “would not be radically different” from its current one.

On the economy, high unemployment is “the most pressing issue” as the nation struggles to emerge from recession, Bernanke told the Senate panel. The Fed is closely monitoring the troubled commercial real estate market, where defaults are rising. Bernanke said he wanted lenders to be willing to rework the terms of the loans when borrowers are having problems making payments.

The Fed chief argued against congressional proposals to let the Government Accountability Office, Congress’ investigative arm, audit the central bank. He says audits that delve into the Fed’s interest-rate decisions could compromise its independence in setting interest-rate policies.

“You promised transparency, but haven’t delivered,” said Sen. Jim Bunning, R-Ky. “You still resist fully opening your books. I understand your concern about the Fed’s independence, but you are the one that threw away the independence by acting as an arm of the Treasury.”

Bernanke said he would work with Congress to release information about how taxpayer money is being used in the financial bailout. But he resisted the idea of providing more information about interest-rate policy.

“Where I am resisting is congressional intervention in monetary policy decision making,” Bernanke said.

Bernanke also worked to beat back an administration proposal to create a new consumer protection regulator for financial services and strip some of those duties from the central bank. The House panel delayed a committee vote on that legislation until September.

Regarding its consumer protection oversight, Bernanke acknowledged, “The Fed hasn’t done all it should have” in the past.

Later this week, the Fed will issue a proposal to boost disclosures on mortgages and home equity lines of credit. It also will include new rules governing the compensation of mortgage originators.

The administration’s plan to overhaul financial oversight, if it became law, would avoid additional AIG-like taxpayer bailouts, Bernanke says.

All the hand-wringing on Capitol Hill about the future shape of the Fed — as well as the nation’s broader regulatory structure — comes at a politically delicate time for Bernanke. His term expires early next year, and President Barack Obama will have to decide whether to reappoint him.

The Fed chief on Wednesday again assured lawmakers that the central bank will be able to reel in its economic stimulus and prevent a flare up of inflation once a recovery is firmly rooted. Still, any such steps will be far off in the future. The central bank’s focus remains “fostering economic recovery,” he said.

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