Bernanke, seeking second term, to defend Fed role

Federal Reserve Chairman Ben Bernanke on Thursday will push back at efforts to curb the Fed's power as he goes before lawmakers considering his nomination to a second term at the central bank's helm.

President Barack Obama nominated the former Princeton University economics professor to another four-year stint as Fed chair in August, praising his handling of the worst financial crisis since the 1930s.

However, the soft-spoken Fed chairman, who was first named to the post by President George W. Bush, is likely to face aggressive questioning when he appears before the Senate Banking Committee at a hearing on his re-nomination.

Lawmakers are upset over taxpayer bailouts of financial firms such as American International Group and Bear Stearns and what they see as lax Fed regulation of banks and lenders that laid the groundwork for the credit crisis.

They realize that Fed Chairman Bernanke played a vital role in saving the financial markets and preventing what could have been the next Great Depression, said Michelle Meyer, an economist with Barclays Capital in New York. But at the same time, there are some people who ... are uncomfortable with the degree of interaction the Fed had with the private sector.

Senator Bernie Sanders, an independent from Vermont, said on Wednesday he was placing a hold on Bernanke's nomination, arguing the Fed chief had done little for average Americans, while going too easy on big banks.

That move, which could force Senate leaders to round up 60 votes just to consider the nomination, could slow the confirmation process and give critics an opportunity to press their case.

The Wall Street Journal, in an editorial Thursday, also said Bernanke does not deserve a second term. The paper praised him for his response to the financial crisis but took him to task for past missteps, such as his support when he was a Fed governor for keeping interest rates low for prolonged period, which many critics contend fueled the housing bubble.

The newspaper's editors also questioned whether he will be willing to make unpopular decisions.

The hard part, the time when central bankers earn their fame, is when they have to take the money away, they wrote.

Treasury Secretary Timothy Geithner rose to Bernanke's defense. He did things that had never been done in the past with enormous creativity and bravery, frankly, he told CNBC on Thursday shortly before Bernanke's hearing was to start.

The president has full confidence in him and we are confident he will be confirmed, he said.

Despite the voices of discontent, the nomination appears likely to overcome hurdles. Committee Chairman Christopher Dodd has endorsed Bernanke's crisis-battling performance, as have many opposition Republicans, although he has said reconfirmation should not be taken for granted.

Bernanke's current term expires on January 31, although he could continue to serve unless replaced. Dodd's panel needs to approve the nomination to send it before the full Senate.

Even if confirmed, as widely expected, Bernanke faces the prospect of running a diminished institution if some congressional proposals to curtail the Fed's powers and political independence become law.

Dodd has proposed stripping the Fed of its regulatory powers in favor of unifying fragmented U.S. bank oversight under a single roof. He would also require presidential appointment and Senate confirmation of regional Federal Reserve bank board chairmen, taking away a prerogative currently enjoyed by the 12 regional Fed banks.

More worrying for the Fed, legislation the House of Representatives could vote on next week would submit the central bank's monetary policy decision-making to review by a congressional watchdog agency. Sanders has backed a matching measure in the Senate.

Bernanke has said the move would expose the Fed to political pressure and cause markets to doubt its ability to keep inflation in check, leading to higher borrowing costs. He will likely use his testimony to try to erect a Senate roadblock to the proposal.

(Additional reporting by Steven C. Johnson; Editing by Chizu Nomiyama)