Bernanke Says Fed ‘Should Have Done More’

Under fire from Democrats and Republicans alike, Ben S. Bernanke on Thursday defended his record as chairman of the Federal Reserve but conceded that the central bank’s lapses contributed to the financial crisis.

“I did not anticipate a crisis of this magnitude,” Mr. Bernanke acknowledged in an occasionally contentious hearing on his nomination for a second term as Fed chairman.

Mr. Bernanke volunteered that the Fed had been “slow” in protecting consumers from high-risk mortgages during the housing bubble and that it should have forced banks to hold more capital for all the risks they were taking on.

“In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”

As he faced the Senate banking committee on Thursday morning, Mr. Bernanke still seemed to have enough support to win approval for a second term.

But he and the Fed as an institution came under withering criticism for failing to recognize the crisis until it was too late and then bailing out financial giants like Citigroup and the American International Group.

The hearing provided new evidence of doubt among lawmakers about the Federal Reserve’s role as the nation’s guardian of the financial system.

“In the face of rising home prices and risky mortgage underwriting, the Fed failed to act,” said Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee. “Many of the Fed’s responses, in my view, greatly amplified the problem of moral hazard stemming from ‘too big to fail’ treatment of large financial institutions and activities.”

At the end of the hearing, Mr. Shelby signaled his agreement with the committee’s Democratic chairman, Senator Christopher J. Dodd of Connecticut, that the Fed should give up a large measure of its authority as a financial regulator.

Mr. Dodd, who strongly endorsed Mr. Bernanke for a second term as Fed chairman, has proposed that the Fed’s powers as a bank regulator ought to be transferred to a new consolidated agency.

Mr. Bernanke and other top Fed officials adamantly oppose that idea, arguing that the Fed has unique expertise and that its ability to preserve financial stability depends on having the detailed information that only a regulator has about the inner workings of major institutions.

The debate is just beginning, and it is unclear whether Mr. Shelby and other Republicans even want to team up with Democrats on an overhaul of financial regulation. Democrats on the committee are divided. Senator Evan Bayh, Democrat of Indiana, made it clear that he wanted the Fed to remain a bank regulator.

Meanwhile, Mr. Bernanke and the Fed came under more populist attacks from lawmakers in both parties.

On Tuesday, Senator Bernard Sanders of Vermont declared that he would try to block Mr. Bernanke’s approval on the Senate floor by placing a hold on his nomination. Senate leaders would need 60 votes, rather than a simple majority, to override the hold.

And Senator Jim Bunning, a Kentucky Republican who was the only person to vote against Mr. Bernanke’s original appointment as chairman in 2006, vowed on Wednesday to “do everything I can to stop your nomination and drag this out as long as I can.”

Instead of even asking questions, Mr. Bunning used all of his allotted time in the first round of questioning for a tirade in which he concluded that “your time as Fed chairman has been a failure.”

Mr. Bernanke did not flinch. While acknowledging that the Federal Reserve had made mistakes, he assert that the huge rescue operations put in place by the Fed, the Treasury and by Congress had prevented the financial crisis from being “markedly worse” than it was.

“Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies,” Mr. Bernanke said.

The Fed chairman also highlighted the central bank’s efforts to tighten financial regulation in many areas, like stricter rules on subprime mortgages and credit card fees, tougher capital requirements and new proposals to regulate executive compensation at banks.

“A financial crisis of the severity we have experienced must prompt financial institutions and regulators alike to undertake unsparing self-assessments of their past performance,” Mr. Bernanke acknowledged.

“At the Federal Reserve, we have been actively engaged in identifying and implementing improvements in our regulation and supervision of financial firms,” he said.

Mr. Bernanke appeared to have the support of most Democrats on the banking committee. Mr. Dodd, the committee chairman, praised Mr. Bernanke’s response to the financial crisis and forcefully endorsed him for a second term — even though he argued that the Fed should give up its role as a bank regulator.

“Under your leadership, Mr. Chairman, the Federal Reserve has taken extraordinary actions to right the economy,” Mr. Dodd told Mr. Bernanke. “I believe that you deserve another term as chairman of the Federal Reserve, and I intend to vote for your nomination.”

Mr. Bernanke, a former professor at Princeton University and a Republican, was appointed to his first term as Fed chairman by President George W. Bush. But he also forged a close relationship during the financial crisis with President Obama, who nominated him for a second four-year term.

If critics like Mr. Sanders and Mr. Bunning follow through on their pledges to block Mr. Bernanke’s nomination, Senate leaders will need to come up with 60 votes to override their holds.

But unlike so many of the partisan battles that have often paralyzed the Senate, because Democrats hold 60 votes, Mr. Bernanke has enough support to clear that hurdle.

Mr. Bernanke’s term as Fed chairman expires on Jan. 31, 2010. But even if the Senate did not confirm him or some other candidate by that date, Mr. Bernanke would still hold his seat as a Fed governor and would be allowed to remain an acting Fed chairman until he or a successor was confirmed.