``Any person as adept as Chairman Bernanke and as experienced as the Board of Governors must have seen the risks,'' says Hodes, the freshman congressman.
Bernanke Stumbles as Lawmakers Bash Fed Over Consumer Lending
By Craig Torres, Alison Vekshin and Scott Lanman
June 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is a hero on Wall Street; the same isn't true in Washington.
Sixteen months after succeeding Alan Greenspan, the chairman has managed to avert recession despite a housing collapse and keep inflation drifting lower in the face of $70 oil. At the same time, his relations with Congress are souring as lawmakers threaten to strip some of the Fed's authority to punish it for what they see as lax credit regulation.
``The Fed chairman has gotten off on the wrong foot with the Democratic Congress,'' says David M. Jones, a former Fed economist and author of four books on the central bank. ``The problem with the entire Bernanke Fed is it's still wet behind the ears.''
Democrats led by House Financial Services Committee Chairman Barney Frank blame a lack of oversight by the central bank for allowing abuses in the subprime-mortgage market. They have threatened to take away some of the Fed's power to write consumer-protection rules -- a blow to Bernanke's prestige that would also signify a lack of confidence on the part of lawmakers whose support he needs to achieve other goals, including his effort to move the Fed toward defining an inflation target.
`Wearing Thin'
``Patience is wearing thin,'' says Representative Paul Hodes of New Hampshire, president of the freshman House Democrats and a member of Frank's committee. Frank's ``lack of patience I think is indicative of the frustration that members are feeling with the Fed.''
Bernanke's lack of Washington savvy and skills was one of the issues observers raised when President George W. Bush picked him for the Fed job in October 2005. He was ``politically untested,'' Tom Schlesinger, president of the Financial Markets Center in Howardsville, Virginia, said at the time.
Citing Bernanke comments that his ``six grueling years'' on a local school board in New Jersey were the ``sum'' of his political experience, Schlesinger said that ``I remember thinking, man, if you think that's problematic, wait until you stick around Washington a little bit longer.''
As long as Bush's Republicans controlled Congress, Bernanke, a 53-year-old former Princeton University professor, by and large could count on a friendly reception on Capitol Hill. Things changed when Democrats gained control of both the House and Senate last November, and began casting a more critical eye on the chairman's priorities and performance.
Inflation Target
One of those priorities has been establishing an inflation target. Even on the 19-member Federal Open Market Committee, which plans to discuss communications policy at its meeting June 27 and 28, opinions differ over how such a target would square with the central bank's mandate to deliver full employment as well as low inflation.
Frank, a Massachusetts Democrat, said Jan. 3 that setting an inflation goal without taking the Fed's employment mandate into account is ``not going to happen when we are in power.''
The increased pressure in Washington stands in stark contrast to the praise heaped on Bernanke for his management of the economy. He has so far avoided the biggest blunder a central bank can make, overshooting on interest rates: He didn't raise them too far to stomp down inflation, triggering a recession. And he didn't cut them as the housing market slumped, which might have fueled more inflation.
`Deft'
``On monetary policy, Bernanke has been very deft,'' says former Fed Governor Lyle Gramley, senior economic adviser to the Stanford Group Co. in Washington. ``He has been pushed by a number of members of the FOMC to tighten monetary policy, and he has very wisely turned his back on that idea.''
Richmond Fed President Jeffrey Lacker dissented four times last year in favor of higher rates. San Francisco Fed President Janet Yellen pulled in the other direction, arguing in February that additional rate increases would hurt growth and employment. This week, the FOMC is forecast to leave its benchmark rate at 5.25 percent for the eighth straight meeting, according to a Bloomberg survey of economists.
``There ought to be a few gold stars'' for monetary policy, says former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC in Washington. Still, he says, ``they might have missed the political dynamics'' on regulation.
Treating Consumers Fairly
Frank and Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, are pressing the Fed to make sure lenders treat consumers fairly -- a responsibility they say it and other banking regulators largely shirked during the housing boom.
``I need a good cop out here,'' Dodd said in an interview. ``I'd like them to be aggressive.''
Credit standards plunged and abuses increased as lenders made $2.8 trillion in mortgage loans from 2004 to 2006. New foreclosures on borrowers with weak or sketchy credit histories reached a five-year high in the first quarter.
``Any person as adept as Chairman Bernanke and as experienced as the Board of Governors must have seen the risks,'' says Hodes, the freshman congressman.
The new Democratic majority in Congress perceives ``a mandate to provide additional strength to consumer protections,'' says Gilbert Schwartz, former associate general counsel at the Fed and now a partner at Schwartz & Ballen LLP in Washington. ``The Fed is going to have to adjust.''
Slow to Pick Up
So far, though, Bernanke has been slow to pick up on the new tone in Congress. In a May 17 speech, the chairman said that while the Fed is ``authorized'' to write rules against abuses in lending, ``regulators must walk a fine line'' in doing so.
That brought a rebuke from Dodd: ``The chairman misspoke. The law requires the Federal Reserve to write rules to protect home borrowers.''
Fed officials say they don't want a quick fix and are trying to find the right long-term approach that will preserve credit for needy borrowers. That doesn't satisfy lawmakers such as Representative Carolyn Maloney, a New York Democrat who chairs a House subcommittee on consumer credit.
The Fed is ``clearly not doing enough,'' she says. ``There is no question this new Congress reflects the election and there is more of a focus on economic fairness.''
Fed officials have so far been summoned to Capitol Hill six times this year to answer questions about consumer lending, twice as many as in all of 2006.
An Empty Chair
The Fed irritated congressional leaders by sending staffers on four occasions, instead of members of the policy-making Board of Governors. On one occasion, a committee threatened to place the Fed's name in front of an empty chair if a governor wasn't provided.
While ``it is our preference to have a governor at a hearing,'' two vacancies on the Board of Governors have made scheduling difficult, Fed spokeswoman Michelle Smith says.
After weeks of criticism, the Fed this month has begun to show more openness to toughening credit rules. Governor Randall Kroszner told a June 13 hearing of the Financial Services Committee that the Fed would ``seriously consider'' using its rule-making authority to prevent abuses.
``Use it or lose it,'' Committee Chairman Frank told Kroszner. ``If the Fed doesn't start to use that authority to roll out the rules, then we'll give it to somebody who will.''
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Alison Vekshin in Washington at avekshin@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .
Last Updated: June 24, 2007 19:04 EDT |
