Ben Bernanke put himself at odds with the Obama administration Wednesday by resisting its plan to create a consumer protection agency for risky financial products. The Federal Reserve chief said those responsibilities should stay with the central bank.
Bernanke's pushback on the White House plan comes at a politically delicate time for the Fed chairman. His term expires early next year, and President Barack Obama will have to decide whether to reappoint him.
In his second straight day on Capitol Hill, Bernanke argued that the Fed has expertise that would be difficult to replicate at a new agency. Consumer oversight, he said, coincides with the Fed's mission to oversee the safety and soundness of banks.
Addressing the Senate Banking Committee, Bernanke defended the Fed's record. Yet he acknowledged "that the Federal Reserve did not do all it should have at certain times in the past."
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Consumer groups and lawmakers have blamed the Fed under then-chairman Alan Greenspan for failing to crack down early on dubious mortgages practices. High-risk mortgages fed the housing boom and led to its collapse.
Bernanke, who took over the Fed in February 2006, eventually pushed through tougher rules. Critics, though, said they came too late to ease the mortgage crisis. More recently, lawmakers have pressed the Fed to speed its adoption of rules to better protect Americans from abusive credit card practices.
The Fed plans Thursday to issue a proposal to boost disclosures on mortgages and home equity lines of credit. It will include new rules covering the compensation of mortgage originators.
"We're going to ban the practice of tying the compensation to the type of mortgage -- having prepayment penalties, for example," Bernanke told lawmakers.
The administration has proposed a new consumer-protection agency as part of a broader revamp of the nation's financial rules. The agency would police deceptive practices in credit cards, mortgages and other products. Such oversight is now scattered among the Fed and other agencies.
If approved by Congress, the Consumer Financial Protection Agency could curtail or ban a host of dubious -- but lucrative -- bank practices. They include ballooning mortgages, excessive credit card rates and surprise overdraft fees.
"I understand why some would want to see a new agency that would be fully committed to this area. And, I'm not criticizing that," Bernanke said. "I'm simply saying that ... we believe we can continue to do good work in this area."
White House officials downplayed Bernanke's resistance to the Obama plan. They said they weren't surprised by his comments, since Fed member Elizabeth Duke spoke out last week against the idea of a new agency to monitor financial products.
Ross Baker, a professor of political science at Rutgers, said he didn't think Bernanke's comments would hurt his standing at the White House or affect the fate of the proposed agency on Capitol Hill.
"He is protecting his turf," Baker said. "That isn't seen as disloyal or a challenge to the administration. It's expected in Washington."
In his testimony, Bernanke said the Fed should not only keep its consumer protection duties, but also take other steps to bolster oversight.
The Fed chief said Congress could amend the Federal Reserve Act to make consumer protection a "major goal" of the central bank. Bernanke also said lawmakers could require the Fed chairman to report to Congress on the state of consumer protection in the financial services industry, similar to the twice-a-year economic report to lawmakers Bernanke gave this week. The Fed also could conduct periodic reviews of whether its consumer policies are sufficient, he said.
And he noted that when the Fed examines banks' safety and soundness, it also checks their consumer compliance. Divorcing those functions could cause regulators to miss valuable insights into the banking business.
Bernanke also said he didn't think conflicts of interest exist between the Fed's consumer protection and bank oversight roles. Regulators who oversee banks are best able to understand the policies that affect consumers.
Sen. Jeff Merkley, D-Ore., disagreed. "Frankly, your response frightens me because I think there are occasions that they're in conflict."
Under the Obama plan, consumers who take out mortgages would automatically get a "plain vanilla" loan -- such as a traditional 30-year fixed-rate mortgage -- unless they opted for a riskier variety.
Bernanke said policymakers should take care not to "roll back all the innovation" that's occurred in financial markets in recent decades. Consumers should have choices, he said, and private companies should be able to offer them.
For a second day, Bernanke faced tough questions about the Fed's extraordinary actions to rescue the economy and its ability to take on more responsibility. Last year's taxpayer-financed rescues of insurance giant American International Group and others outraged many ordinary Americans and some lawmakers.
Sen. Richard Shelby, R-Ala., raised concerns about an administration proposal to expand the Fed's duties to police globally interconnected financial firms whose collapse could imperil the entire U.S. economy.
"It was the failure, I believe, of the Fed to adequately supervise" that contributed to the meltdown, said Shelby, the committee's senior Republican.
Bernanke insisted that the Fed's role under the administration proposal "would not be radically different" from its current one.
Bernanke's policies have been credited with helping avert a financial catastrophe last year. But critics worry about putting more taxpayer money at risk -- and about leaving financial firms more inclined to take big gambles, confident the government will back them.
The Fed chief also argued against congressional proposals to let the Government Accountability Office, Congress' investigative arm, audit the central bank. He says audits that delve into the Fed's interest-rate decisions could compromise its independence.
"You promised transparency but haven't delivered," said Sen. Jim Bunning, R-Ky. "You still resist fully opening your books. I understand your concern about the Fed's independence, but you are the one that threw away the independence by acting as an arm of the Treasury."
Bernanke said he would work with Congress to release information about how taxpayer money is being used in the financial bailout. But he opposed the idea of disclosing more information about interest-rate policy.
"Where I am resisting is congressional intervention in monetary policy decision making," Bernanke said.
------Associated Press Writer Philip Elliott contributed to this report.