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Senators grill Fed’s Ben Bernanke over bank bailouts

At confirmation hearings for Fed Chairman Ben Bernanke Thursday, some senators decried bailouts of 'too big to fail' firms. Others said the economy would be in worse shape without the Fed’s actions.

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However, some financial experts are skeptical that the legislation now under review will truly result in what Rep. Barney Frank (D) of Massachusetts has called "death panels" for large banks. They say the reform under consideration also leaves open the possibility that banks will expect bailouts again in the future.

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Concern about bailouts

A range of lawmakers raised concerns about bailouts at the hearings.

"Many of the Fed's responses [to the crisis] greatly amplified the problem of moral hazard stemming from too big to fail treatment of large financial institutions," Sen. Richard Shelby (R) of Alabama said. "Taxpayers simply should not be subjected to possible losses from private risks."

Bernanke "could have broken up too-big-to-fail financial institutions that took Federal Reserve assistance, but he did not," Sen. Bernie Sanders, a Vermont independent, said in a statement of opposition to Bernanke released before the hearing.

Sen. Jim Bunning (R) of Kentucky accused the Fed of being willing to prop up banks for as long as they want, raising the risk that unhealthy banks will exist as “zombies,” or functioning banks that are not making many loans.

"You are the definition of a moral hazard," he said to Bernanke. "I will do everything I can to stop your nomination."

Most senators don’t appear to be in that camp. Sen. Christopher Dodd (D) of Connecticut was among those who expressed support for Bernanke during the hearing.

So which is the accurate view of the Bernanke Fed, the dark or light one? With the economy still digging out from the crisis, that debate will probably go on for a long time.

Asked to grade himself during the hearing, Bernanke allowed room for improvement. But he vigorously defended the efforts to avoid the disorderly bankruptcy of large firms such as insurer AIG.

Without that action, "we could very well be in a depression-like situation," he said, with a much higher unemployment rate.

See also:

Ben Bernanke and Fed in crosshairs of left and right

JPMorgan earnings show 'too big to fail' banks getting bigger

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