Federal Reserve Chairman Ben S Bernanke’s success in stabilising the financial system through unprecedented use of the central bank’s powers may come at the cost of Congress limiting some of that authority in the future.
As the credit crisis ebbs, US lawmakers are increasingly questioning the actions the Fed took to counter the turmoil. Representatives Edolphus Towns of New York and Darrell Issa of California said on Thursday they will call Bernanke to Capitol Hill to testify on his role in pushing through Bank of America Corp’s purchase of Merrill Lynch & Co last year.
Even House Financial Services Committee Chairman Barney Frank, who has praised Bernanke in the past, is rethinking proposals to make the Fed the sole overseer of risk in the financial system.
“Members of Congress are finally coming to terms with what the Fed can do,” said Dino Kos, a managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed. “Central banks are able to make far-reaching decisions quickly without congressional approval.”
The result: The Fed may find itself subject to more congressional scrutiny than in the past and might even have some of its powers to intervene in the financial markets and the economy clipped. The fresh questions about the Fed’s steps may also affect Bernanke’s chances of securing a second term as Fed chief when his current four-year stint expires in January.
The White House, for its part, on Thursday reiterated its backing for Bernanke as lawmakers queried Bank of America Chief Executive Officer Kenneth Lewis about the Merrill takeover.
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Over the past year, Bernanke has used emergency authority not deployed since the Great Depression to avert a collapse of the financial system.
He employed the Fed’s balance sheet to purchase more than $20 billion in risky assets from Bear Stearns Cos to facilitate the firm’s merger with JPMorgan Chase & Co. He committed $83 billion to stabilise insurer American International Group Inc, and billions more in loss insurance against the portfolios of Citigroup Inc and Bank of America.
The moves have won plaudits in the financial markets for the Fed and Bernanke. Only seven of 58 economists who responded to an e-mail survey this week by Bloomberg News said the 55- year-old chairman shouldn’t be reappointed.
“He’s done a very good job,” said Laurence Meyer, a former Fed governor who is now vice chairman of St Louis-based Macroeconomic Advisers. “He’s responded aggressively and creatively to the financial crisis.”
Now, as financial markets stabilise, it’s that assertiveness and ingenuity that is being called into question on Capitol Hill.
The latest controversy is over the pressure that Bernanke and then-Treasury Secretary Henry Paulson put on Lewis to close the Merrill deal at the end of last year. Lewis, 62, told Congress yesterday he decided to proceed with the takeover after regulators said they might remove management.
“There was a whole lot of back-room dealing,” Towns, the Democratic chairman of the House Oversight Committee that heard Lewis’s testimony, said in a Bloomberg Television interview on Thursday. “We plan to get to the bottom of that.”
Issa, the senior Republican on the committee, said in a separate interview that he hasn’t decided yet whether he thinks Bernanke should keep his job as a result of his actions.
“Bernanke will be hurt by the disclosure that he arm- twisted Lewis,” predicted David Jones, president of Denver- based DMJ Advisors and author of four books on the Fed.
Many lawmakers are already pushing for greater oversight of the central bank through broader audits of its operations by the Government Accountability Office. A bill that would remove limits on GAO audits of the Fed and direct the agency to issue a report by the end of next year was introduced by Representative Ron Paul, a Texas Republican, and has 208 cosponsors.
House Republicans on the Financial Services Committee, led by ranking member Spencer Bachus of Alabama, have also proposed stripping the Fed of its supervisory powers and limiting its emergency authority to give bailout loans.
Support for the Fed in Congress to become the leading systemic-risk regulator has also faded. The Treasury will propose that role for the Fed when the administration rolls out its proposals for financial-regulatory reform, people familiar with the matter said.
“I don’t think one single agency like the FSA (Financial Services Authority) in England is the best way to go,” Frank, a Massachusetts Democrat, said on Thursday in an interview.
Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said last month he has “great skepticism” over expanding the central bank’s authority.
The Fed has already responded to the congressional criticism by providing more information about its credit facilities. For the first time, the central bank on June 10 announced details on the number of borrowers and the ratings of securities pledged as collateral for loans. The data came in a new report to be released monthly.
Bernanke has also sought to portray the Fed’s expansive use of its powers to prop up the financial system as necessary for the good of the economy.
“I come from Main Street,” he told CBS News’s “60 Minutes” television program in March, while standing in his hometown of Dillon, South Carolina. “I care about Wall Street for one reason and one reason only, because what happens on Wall Street matters to Main Street.”
After the show, Bernanke received a phone call from the White House. “I called him right after the 60 minutes interview to tell him I thought he did a great job,” Rahm Emanuel, President Barack Obama’s chief of staff, said in an interview.