By Drew Pierson

WASHINGTON (MNI) Federal Reserve Chairman Ben Bernanke Tuesday gave
his strongest endorsement yet of the plan produced by the National
Commission on Fiscal Responsibility and Reform at a Senate Banking
Committee Hearing Tuesday.

“It [Simpson-Bowles] does have a profile that seems reasonable,”
Bernanke told lawmakers.

The bipartisan plan to cut $4 trillion from the national deficit
over the next 10 years — mostly through spending cuts, but with some
new taxes — received bipartisan support in late 2010 from its founding
committee, but the plan has never gained traction in Congress.

As he has repeatedly, Bernanke noted it was not for him to decide
how Congress wished to tackle the numerous looming fiscal challenges
facing the United States at the end of the year and beyond, and stressed
he was not endorsing any particularly method to do so.

“I realize it’s very contentious, taxes versus spending, and I
don’t want to get into that,” Bernanke said, adding the Simpson-Bowles
plan left large swaths of details up to lawmakers to solve even if it
were to be enacted.

Members of the Banking Committee were quick to pounce on the grim
economic news in Bernanke’s semiannual Monetary Policy Report, with each
side arguing that the data lent support to their respective plans.

Bernanke detailed an economic picture in the United States that was
“decelerating,” with second-quarter GDP expected to grow less than 2%
and unemployment likely to remain above 7% until 2014.

Bernanke once again said headwinds from Europe, and the looming
“fiscal cliff” were the two greatest challenges to continued growth.

Bernanke urged those behind the dais to act, but in a more gradual
method than the sudden shock of tax hikes and $1 trillion in automatic
spending cuts due at the end of the year, the so-called cliff. The
Simpson-Bowles plan spreads out much larger cuts over a longer period of
time.

“It is simply not possible for deficits to continue the way they
are projected,” Bernanke said.

But those same lawmakers had criticism for Bernanke and the Fed of
their own, particularly regarding quantitative easing.

Though Bernanke made no indication of future actions for stimulus,
he detailed a range of options including, but not limited to, different
types of asset purchase programs, using the discount window, additional
communication policies by the Fed, and cutting interest rates on excess
reserves.

The Federal Open Market Committee next meets July 31 to August 1.

Democrats like Sen. Herb Kohl of Wisconsin urged Bernanke to be
more aggressive with quantitative easing to help unemployment, while
more conservative members of the Banking Committee questioned whether
further action would stoke inflation.

“We feel comfortable we have the tools to unwind these policies in
a way that will not threaten inflation,” Bernanke told Sen. Jerry Moran,
Republican from Kansas.

Besides purchase programs, other senators took issue with Fed
policies. Sen. Jim DeMint, Republican of South Carolina, said U.S.
savers had lost $400 billion in interest as a result of lowered interest
rates since the financial crisis.

Sen. Bob Corker actually criticized the Fed for acting because it
took the pressure off Congress to fix its fiscal house, he said.

“I candidly wish we had a chairman of the Fed who would say, ‘Look,
we’re not doing anything else … quit looking to us’,” Corker said.

Besides the fiscal cliff, several senators brought up regulations,
both in the Dodd-Frank Wall Street Reform and Consumer Protection Act,
as well as U.S. implications for the unraveling LIBOR scandal in London.

Sen. David Vitter, Republican of Louisiana, questioned how
Dodd-Frank had really affected capital requirements for U.S. banks, and
whether it had really improved their standing. Sen. Mark Warner,
Democrat of Virginia, responded that more than $300 billion in capital
reserves had been added to U.S. banks since the financial crisis.

Vitter also criticized the Fed for not doing more when employees
first learned of the LIBOR manipulations. Bernanke called the LIBOR
situation “unacceptable,” and said he personally had not learned of any
LIBOR issues until press reports began circulating in 2008.

Bernanke said Federal Reserve employees who had encountered such
information on their own had turned that information over to more
appropriate authorities.

After being asked by many senators what the U.S. could do with
regard to the LIBOR situation, Bernanke noted that because LIBOR was a
bank rate set in London, the Fed couldn’t unilaterally act to change how
it was managed.

Bernanke said one solution to replace LIBOR was moving from what is
essentially a reportable rate to a market index, such as the Treasury
general collateral repo rate.

Sen. Tim Johnson, chairman of the Senate Banking Committee, said
issues like LIBOR made him unsympathetic to industry complaints about
the effects of regulation.

“Any cost Wall Street bears pales in comparison to the trillions of
dollars Americans have lost as a result of the financial crisis,”
Johnson said.

** MNI Washington Bureau: (202) 371-2121 **

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