Bernanke in the Hot Seat on Capitol Hill

During two days of congressional hearings this week, Federal Reserve Chairman Ben Bernanke told lawmakers he expects foreclosures to head higher still. He added that Fed officials anticipate an economic recovery to start off slowly, primarily because consumers are struggling with high debt and declining housing prices.
""The combination of unemployment and falling house prices -- the double trigger -- does create a very high rate of foreclosures,"" he said. ""Our assessment of the foreclosures is that it's likely to peak in the second half of 2009, corresponding with the peak in the unemployment rate, and perhaps, be somewhat less in 2010.""
Bernanke said Fed officials expect the unemployment rate, which has now reached 9.5 percent, to top out at the end of 2009 but remain elevated through 2011, even though the economy should start growing again by the end of this year. He stressed that despite evidence of small improvements in conditions, the Fed intends to keep interest rates extremely low for an extended period.
""I want to be clear that we have a very long haul here because, even if the economy begins to turn up in terms of production, unemployment is going to stay high for quite a while, so it’s not going to feel like a really strong economy,"" Bernanke said in his biannual report to Congress.
Bernanke also alluded to steps the Fed is considering to alleviate the risk of inflation as it draws back the billions of dollars it has injected into the economy to keep the nation’s financial system afloat. One option, he said, is for the Fed to pay interest rates on reserves held at the central bank, adding that some of the agency’s rescue efforts have already begun to unwind. For example, the total credit extended by the Fed to banks and other entities has fallen below $600 billion, down from about $1.5 trillion at the end of 2008, he said.
Bernanke’s appearance on Capitol Hill comes at a critical time, as lawmakers debate financial reform measures and scrutinize the central bank’s authorities over consumer financial products. Many in Congress argue that U.S. banking regulators, including the Fed, did too little to rein in lending practices during the housing boom, which quickly led to unprecedented delinquencies and foreclosure-ravaged communities.
Bernanke confessed to the Senate Banking Committe on Wednesday, ""We were not quick enough, we were not aggressive enough to address consumer issues earlier in this decade.""
Senator Richard Shelby (R-Alabama) said the Federal Reserve had ""failed the American people"" and called for a probe into the Fed’s actions outside of monetary policy. ""If the Fed had conducted its regulatory oversight with great diligence, I do not think the financial crisis would have achieved the depth and scope that it did,"" Shelby said.
Within the congressional walls, other lawmakers pressed Bernanke for what solutions the central bank might still have up its sleeves to loosen credit markets and stem still-rising foreclosures.
Committee Chairman Christopher Dodd (D-Connecticut) pointedly asked Bernanke, ""When will this recovery...reach the families who are facing foreclosures, people who have lost their jobs...x What are you doing as the Fed to help see that they are going to reap the benefits of these effortsx""
The Obama administration has proposed consolidating borrower protections into a new Consumer Financial Protection Agency, which would have far-reaching oversight and enforcement authorities over the entire residential mortgage financing industry, as well as other consumer-facing financial products.
Bernanke argued that legislators should instead ""put consumer protection in the Federal Reserve Act along with full employment and price stability as a major goal of the Fed.""
To strengthen his case, Bernanke said Congress could require an annual report and conduct hearings and reviews to assess the central bank’s performance as a protector of consumers’ rights. He added that lawmakers should strengthen the status of the Federal Reserve Board’s existing Consumer Advisory Council.
A pending bill would allow the Government Accountability Office to audit the Fed in an attempt to increase transparency and oversight of its actions, but Bernanke claims it could impair the central bank's independence.
Bernanke's term as head of the Federal Reserve expires in six months, and it's not yet clear if President Obama will choose to reappoint him.
Despite the skepticism over the Fed’s role and Bernanke’s leadership that seems to be permeating from Capitol Hill, a global poll conducted by ""_Bloomberg News_"":http://www.bloomberg.com shows that ""most influential investors give Bernanke high marks for combating the worst financial crisis since the Great Depression."" _Bloomberg _reported, nearly 75 percent of investors surveyed hold a favorable view of Bernanke's policies, and 61 percent say the world economy is stable or improving.