The Federal Reserve can be trusted with protecting consumers and overseeing massive companies whose collapse could pose a risk to the overall economy, the central bank's chief Ben Bernanke said Thursday.
In his opening statement at a hearing of the House Financial Services committee, Bernanke told lawmakers that the Fed is "well suited" to supervise large, interconnected firms. As part of sweeping financial regulatory reform measures currently under discussion in Congress, the Obama administration has proposed that the Fed regulate these firms in an effort to avoid the government having to bail out so-called "too big to fail" companies as has occurred during the current crisis.
"There's nobody more sick and tired of bailouts than me," Bernanke said.
"I do not in any way support too-big-to-fail," he emphasized. "I think it's a huge problem. I think whatever we do must address that problem. Big companies must be allowed to fail, but they must be allowed to fail safety, so that they don't bring down the system."
While the administration has proposed boosting the powers of the Fed with the resolution authority, they also want to reduce the central bank's powers on issues of consumer protections. The administration wants to create a Consumer Financial Protection Agency to handle these matters.
Last Wednesday the panel's chairman Barney Frank, D-Mass., released a "report card" on the Fed's record in consumer affairs, denouncing the central bank's "inattention and inaction" and alleging that "their motivation to protect consumers has been driven more by congressional pressure rather than a sense of duty to protect the American public."
"I certainly concede that until recently we have not done what we should have done in this area," Bernanke acknowledged, before adding, "I think we are very competent and we have the skills and the mix of talent and experience to do a good job here and I think the issue is essentially is the confidence that Congress has in our focus going forward."
Bernanke Optimistic About Economic Future
At a hearing that stretched from Thursday morning into the early afternoon, the Fed chief touched on a number of other topics in his visit to Capitol Hill.
Asked about World Bank president Robert Zoellick's comments earlier this week that the United States should not "take for granted" the dollar's status as the world's main reserve currency because it will be challenged in the future by a growing number of other options, Bernanke replied, "I agree with two things Mr. Zoellick said. The first is, I believe he said that there is no immediate risk to the dollar – this is a relatively long-term issue. I also agree with him, though, that if we don't get our macro house in order, that that will put the dollar in danger and that the most critical element there is long-term fiscal stability."
On inflation, Bernanke said, "We are confident that we can manage our policies to support the economy without inducing inflation in the medium term. We are committed to low inflation and we fully believe we have the tools and the political will to do that."
On executive compensation, Bernanke said the Fed is "about to issue guidance for comments on executive compensation which will apply not only to the top, you know, five or ten executives but way down into the organizations – traders or anybody whose activities can affect the risk profile of the company. We view this as a safety and soundness issue."
"There's two principles," he continued. "One is that the structure of executive compensation should not be such as to incentivize excessive short-termism or risk-taking. And secondly, that there be a reasonable connection between actual performance and pay. You know, the American people don't care if a star baseball player gets paid a lot of money as long as he earns the money. The same applies, I think, to the financial sector. But they are upset if somebody earns a lot of money and their company fails."
Asked if growing commercial real estat problems could trigger another crisis, Bernanke said that market poses "a very serious problem" but he does not think it will trigger another crisis.