Federal reserve chief heads back to Capitol Hill

Federal Reserve Chairman Ben Bernanke heads back to Capitol Hill Wednesday, where he's likely to face more tough questions about the central bank's extraordinary actions to rescue the economy and its ability to take on even more responsibility.

Last year's taxpayer-financed rescues of insurance giant American International Group and others have touched a nerve with the public and some lawmakers.

Although Bernanke's innovative policies have been credited with averting a financial catastrophe last year, critics worry about putting taxpayers' money at risk and creating a situation where companies may feel more inclined to take big gambles on the belief that the government will clean up their messes.

Bernanke, who is slated to appear before the Senate Banking Committee at 10 a.m. EDT, argues that a collapse of AIG would have put the entire financial system and the broader economy in peril.

Provisions included in the Obama administration plan to overhaul financial oversight, if they were to become law, would avoid a repeat of additional AIG-like taxpayer bailouts, says Bernanke.

The Fed chief also is likely to run into fresh skepticism from senators wary of expanding the Fed's duties to police big financial companies as envisioned by the administration. Some members of the House Financial Services Committee on Tuesday argued that the Fed failed to spot problems that led to the financial crisis in the first place.

Bernanke countered that the administration's proposal would be a "modest reorientation" of the Fed's powers, not a great expansion of them.

All the hand-wringing on Capitol Hill about the future shape of the Fed - as well as the nation's broader regulatory structure - comes at a politically delicate time for Bernanke. His term expires early next year, and President Barack Obama will have to decide whether to reappoint him.

The Fed chief on Tuesday also sought to assure investors and Congress that the central bank will be able to reel in its economic stimulus and prevent a flare up of inflation once a recovery is firmly rooted. Still, any such steps will be far off in the future. The central bank's focus remains "fostering economic recovery," he said.

Bernanke also worked to beat back an administration proposal to create a new consumer protection regulator for financial services and strip some of those duties from the central bank. The House panel delayed a committee vote on that legislation until September.

Consumer groups and lawmakers have blamed the Fed for failing to crack down early on dubious mortgages practices that fed the housing boom and figured into its collapse. Later this week, the Fed will issue a proposal to boost disclosures on mortgages and home equity lines of credit. It also will include new rules governing the compensation of mortgage originators.

Bernanke also argued against congressional proposals to let the Government Accountability Office, Congress' investigative arm, audit the central bank. He feared that audits that delve into the Fed's interest-rate decisions could compromise its independence in setting interest-rate policies.