Why Bernanke’s Power Will Be ‘Curtailed’

If Ben Bernanke is confirmed for a second term at the Federal Reserve, he'll most likely face a country mired in double-digit unemployment with a deficit that's expected to balloon to $9 trillion. This is not a job everyone would want—overseeing and regulating the nation's banks during the worst financial crisis since the 1930s. But the Great Depression is one of Bernanke's specialities, a topic he tackled as a graduate student at MIT. (Story continued below...)

President Obama cited this expertise—along with Bernanke's calm temperament and creativity—as the primary reasons for his reappointment. The Senate banking committee still has to confirm Bernanke, but he's accepted to pass that test with ease. NEWSWEEK's Nancy Cook recently spoke with Rep. Barney Frank, chairman of the House Financial Services Committee and recent YouTube sensation, about Bernanke's tenure, his missteps with AIG, and whether the Fed will amass even more power in the years ahead. Excerpts:

Were you surprised by Obama's announcement to nominate Bernanke to the Fed for a second time? Did the president have any other choice?
I always assumed he was going to appoint him. Things are dicey now in the economy, and psychology is a big part of this. I think the continuity is important. Bernanke has performed very well. And, for people who like bipartisanship, this is the right thing. Bernanke was the single most important economic appointment President Bush made. I have always been skeptical of all of this talk of bipartisanship. Some people would say, "Why couldn't President Obama just appoint a Democrat?" But he rejects that and gives out the appointments based on who's qualified.

The one political bump that Bernanke did have was that he put money into AIG without putting any regulations on the bonuses. That's just one mistake. The Fed's other missteps were inactions rather than mistakes. When the financial crisis hit, Bernanke didn't initiate any action until we [the House of Representatives] did.

What challenges will mark Bernanke's second term?
One challenge is going to be unwinding the liquidity that he's put into the economy with the cooperation of [former Treasury secretary Henry] Paulson and [current Treasury Secretary Timothy] Geithner. I think it's doable. It was essential to put liquidity in there, but it was extraordinary. I also think he's as well positioned as anybody going forward to play a major role in implementing a new set of rules for the economy. The economy still needs to have dynamism but not have too much risk-taking. As things in the economy get better, we need rules that allow things such as derivatives to play a role without becoming destabilizing.

Over the past year we've arguably given Bernanke more power than we've ever given a Fed chair. Should one man have that much power over the economy?
We're going to curtail the power of everyone at the Fed, including him. First, I believe, we should remove the consumer-protection jurisdiction that they haven't used very well. We need to take all of those powers [and] put them in a separate regulatory agency. We're also going to improve transparency at the Fed. The Fed should make public, at some point, every transaction it does. There needs to be enough of a time lag, though, so that it doesn't factor into people's financial decisions. We don't want people to start trading against the Fed. Bernanke understands this. Finally, we're going to put constraints on the way we lend money, but we're still working out the specifics on that.

You seem confident that financial regulation will pass Congress. Are you worried that the health-care debate will sideline any financial-reform bill ?
I don't think it will get sidelined. Nobody in the Congress denigrates it. There's general agreement outside of the deregulatory Republicans that we need somebody doing systematic risk regulation. The question is, what kind of reassurance do you give people? That's still got to be worked out. But I'm confident that the House will pass a comprehensive bill. A great deal of work has been done. I think the president is likely to sign it by the end of this year. This will be the best set of regulations since the New Deal. And there'll be an increased role for the Fed and other regulators to do systematic risk regulation.

Bernanke's appearances before your committee have been pretty heated at times. Can we expect more of those heated public debates during Bernanke's second term?
What kind of question is that? Will there be heated debates over public policy? This is America. Of course there will be. There will be one issue that will be generally debatable. Bernanke and his colleagues put a lot of money into the economy. At some point it will have to be taken back, and there will be heated discussions about that.

Are you happy that the health-care town halls are over?
I don't think the town halls are over yet.

What about becoming a YouTube sensation from that one town hall in Massachusetts?
My life has been swallowed up by the financial crisis this year. I've been working on legislation and problems that are obscure and unpopular. One Tuesday night, I make a couple of wisecracks, and it's all over the Internet. There's a great disparity between the things you work hard on and the things you're recognized for.

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