Bernanke says Fed can take on supercop role

Federal Reserve Chairman Ben Bernanke on Tuesday fended off congressional skepticism about expanding the Fed's duties to police big financial companies given the central bank's failure to catch problems that led to the financial crisis.

Bernanke also faced some grilling from the House Financial Services Committee about taxpayer bailouts of financial companies, slow moving efforts to curb home foreclosures and concerns about the Fed's track record in protecting consumers from abusive practices from lenders, credit card companies and other financial service providers.

"The Fed has made some big mistakes," said the panel's highest-ranking Republican, Spencer Bachus of Alabama. Letting the Fed become the financial supercop would be "just inviting a false sense of security" that would be shattered at taxpayers' expense, he warned.

Bernanke argued that the Obama administration's proposal would be a "modest reorientation" of the Fed's powers, not a great expansion of them.

The Fed chief also sought to beat back an administration proposal that would create a new consumer protection regulator for financial services and strip some of those duties from the central bank.

Consumer groups and lawmakers have blamed the Fed for not cracking down early on dubious mortgage practices that fed the housing boom and figured into its collapse. Later this week, the Fed will issue a proposal boosting disclosures on mortgages and home equity lines of credit. It also will include new rules governing the compensation of mortgage originators.

Bernanke urged Congress to keep proposals to audit the Fed away from monetary policy duties. "A perceived loss of monetary policy independence could raise fears about future inflation," he warned.

Ron Paul, R-Texas, a frequent Fed critic, rejected that argument and said the Fed already makes political calculations.

"Just the fact that (the Fed) can issue a lot of loans and special privileges to banks and corporations," Paul said. "That's political."

Bill Posey, R-Fla., who wants the Fed to be more open, argued that some people rightly say "you can find out more about the operations of the CIA, than the Fed. The public has the right to know."

Bernanke's term expires early next year, and President Obama will have to decide whether to reappoint him. The Fed chief's innovative policies have been credited with pulling the economy from the edge of the abyss last year. But those actions have also touched off criticism about putting taxpayers at risk and whether the government should be cleaning up Wall Street messes.

Bernanke sought to assure investors and Congress that the Fed will be able to reel in its extraordinary economic stimulus and prevent a flare up of inflation when the recovery is more firmly rooted.

Any such steps will be far off in the future and the central bank's focus remains "fostering economic recovery," he said.

To that end, Bernanke again pledged to keep its key bank lending rate at a record low near zero for an "extended period." Economists predict rates will stay at record lows through the rest of this year.

Laying out a plan now to unwind the Fed's stimulus may give Bernanke more leeway to hold rates at record lows to brace the economy. That's because doing so could tamp down investors' fears that the Fed's aggressive actions to lift the country out of its longest recession since World War II could spur inflation later on.

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