(Updates with Bernanke on fiscal risks and new mortgage rules)
WASHINGTON, July 22 (Reuters) - The following are highlights from the question and answer session at the U.S. Senate Banking Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke.
Bernanke was delivering the central bank’s semiannual report on monetary policy and the economy, and repeated prepared testimony he gave to the House Financial Services Committee on Tuesday. For a story on Bernanke’s testimony on Tuesday, see, [ID:nN21221058] For highlights of Bernanke’s prepared testimony, see [ID:nN21357294] For a text of Bernanke’s prepared testimony, see [ID:nN21207618] To access other stories on Fed policy, see [FED/AHEAD]
BERNANKE ON NEW RULES ON MORTGAGE ORIGINATOR COMPENSATION:
“We are going to ban the practice of tying the compensation to the type of mortgage to the, having pre-payment penalties for example. ... We will be providing all the details at our meeting tomorrow. But the purpose of the regulation would be ... to provide no incentives to brokers to steer borrowers into inappropriate high-cost mortgages.”
“I think what we have, including the fact that some banks are now restructuring (commercial) mortgages, will help lead in the right direction. Whether they will be enough, I honestly can’t tell you. Again, I’m not sure what interventions there are except those that would involve fiscal risks and fiscal costs to the government which may be appropriate but I think it’s Congress’s call on that one.”
BUNNING: “I understand your concern about the Fed’s independence, but you are the one that who threw away the independence by acting as an arm of the Treasury and engaging in fiscal policy. Do you understand why Congress and the public think the Fed’s independence has already been compromised?”
BERNANKE: “I understand but I think it’s a misconception. The Federal Reserve has worked with the Treasury, both the Republican and the Democratic Treasury, because in a situation of financial crisis, it’s very important and I think the American people want to see their financial leadership working together to protect the stability of the system.”
BUNNING: “But your job is monetary policy, not fiscal policy.”
BERNANKE: “My job is also financial stability.”
BUNNING: “So you think interfering or assisting the Treasury with fiscal policy is part of the Fed’s task?”
BERNANKE: “Not fiscal policy. We have a joint statement with the Treasury which makes clear that the Fed should not be responsible for credit allocation or fiscal policy. We are looking at financial stability. That’s our objective.”
BUNNING: “Yesterday you made it clear that you think the Fed has the tools to stop the coming inflation by controlling all of the new money you have printed. You may be right. But do you have the will as former Chairman (Paul) Volcker did to tighten even if the economy is still weak?”
BERNANKE: “Senator it was in 1978 in the Humphrey-Hawkins bill that Congress put in the exclusion for monetary policy from the GAO audit bill. That was right before Volcker came in and Volcker was able to take those decisions because Congress did not intervene, although there were plenty in Congress who said they should intervene, so I guess —“
BUNNING: “But I’m asking you, would you do it?”
BERNANKE: “We will absolutely do it, so long as we are not forced to do something different by Congress.”
BUNNING: “Even if the economy is still weak?”
BERNANKE: “We will take the necessary actions to balance off appropriately the price stability and full employment parts of our mandate.”
“I do believe, for the broad economy’s health or fiscal health, we do need to address the problem of increasing cost. And so any program that is undertaken should look to how we’re going to get control of costs so it will not bankrupt both our government and eventually our economy.”
“The American consumer is not going to be the source of a global boom by any means. On that very topic, we are continuing to encourage our trading partners in Asia and elsewhere to understand — and I believe that they do — that they need to substitute their own domestic spending, their own domestic demand, for American consumers as the engine of growth in their economies.”
“We’re seeing, for example in China with their large large fiscal package and their attempts to strengthen their infrastructure spending, we’re seeing some motion in that direction.”
“The Congress should have the ability to oversee all aspects of our operations, including whether or not we we have appropriate financial controls, whether we are lending on a good basis of collateral, and so on. So, we are willing to work with you on that. We do think that the Congress has the right to see how we are using taxpayer money. Where we are concerned is that the Congress would be intervening in our specific policy decisions relating to monetary policy and the economy.”
“So, yes we are quite willing to work with Congress to try to figure out exactly where the line should be.”
“We were not quick enough and we were not aggressive enough to address consumer issues early in this decade. I agree with that. I think what we have demonstrated in the last few years is that we have the capacity, we have the ability, we have the expertise, the range of abilities, and the complementarity with our others activities to be effective when we are working in that direction.”
“My recommendation to you to consider would be to ask whether there are steps that could be taken that would strengthen the commitment of the Federal Reserve so that it would be strongly committed to this area in the future. A few suggestions I would make. One would be to put consumer protection in the Federal Reserve Act along with full employment and price stability as a major goal of the Fed. A second step could be to require the chairman to come before you or another committee at least once a year to present a report, the same way we do for monetary policy, on our consumer protection steps.”
“We are working to improve those conditions. We are working with banks, for example. In the same way that banks should be encouraged to work out defaulting mortgages for residential borrowers, it’s in their interest to work out problem loans in CRE (commercial real estate) areas, as well. And many banks will be facing mountains of CRE challenges going forward. On the TALF, as you know, we have recently added to the list of assets we are supporting both new and legacy commercial mortgage-backed securities in an attempt to open up the CMBS market, which has been an important source of financing for this area in the past. It’s early yet to know how much effect it will have. ...
We currently have an expiration date of Sept. 31 on the TALF. We will certainly be monitoring the situation and if markets continue to need support we will be extending the final date of that program.
BANKING COMMITTEE RANKING REPUBLICAN RICHARD SHELBY ON FED SUPERVISION:
“In the end, it was the failure, I believe, of the Fed to adequately supervise our largest financial institutions that required the deployment of its monetary policy resources to stave off financial disaster. In light of the Fed’s record of failure as a bank regulator, it should come as no surprise that Congress is taking a closer look at the Fed and reconsidering its regulatory mandate.”
SENATE BANKING COMMITTEE CHAIRMAN DODD ON CONCERNS ABOUT FEDERAL RESERVE:
“Concerns that I’ll raise here this morning more go to the institutional issue of the Federal Reserve, as distinguished from your leadership over the last several years in grappling with these many complicated issues.
I’m very supportive of the efforts you’ve been trying to make as the chairman of the Federal Reserve, but I have some serious issues about the institutional response to all this as we go forward.”
“The administration has also proposed expanding the Fed’s power over systemically important companies. I have a number of concerns about this proposal, as many of my colleagues do on this committee, not the least of which is why does the Fed deserve more authority when institutionally, it seemed to have failed to prevent the current crisis?”