Yellen rejoins QE debate as hearing gives critics forum

Bailout Foes

Senators will be eager to hear Yellen’s perspective on bank bailouts and regulation. When Bernanke was renominated to be Fed chairman in 2010, he was opposed by a bipartisan group of 30 senators, the most ever for a Fed chief, as many lawmakers fumed over bailouts of the largest financial institutions. Yellen may have to defend those crisis-era decisions.

“I didn’t support the QE and I didn’t support the bailouts so we do have some philosophical differences,” said Senator Dean Heller, a Nevada Republican on the banking panel, in an interview last week. Heller said he had not decided how he would vote, “but I do want to take a very fair look at this and give her every chance possible.”

Last month, when President Barack Obama announced her nomination, Yellen said more needs to be done to strengthen the nation’s economic recovery.

Unfinished Business

“While we have made progress, we have farther to go,” she said Oct. 9. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families.”

On Nov. 8, a Labor Department report showed employers added 204,000 workers to payrolls last month, more than economists forecast, on the strongest hiring by companies since February.

If confirmed, Yellen will lead the Fed’s efforts to finish implementation of the most sweeping overhaul of financial regulation since the 1930s. Rules on proprietary trading and bank capital are pending.

U.S. financial regulators are also trying to ensure that a failure at one of the largest banks won’t threaten to trigger an economic collapse, requiring taxpayer support to prop up the bank. The Dodd-Frank Act requires banks to write plans on how they would wind operations down, and empowers the Federal Deposit Insurance Corp. to reorganize a failing bank while imposing losses on shareholders and creditors.

Capital Buffers

Still, Congress is skeptical that the largest, most complex banks could fail without taxpayer support. Senate Banking Committee members Brown and Vitter, have introduced a bill that would set 15% capital requirement for so-called megabanks, those over $500 billion in assets, as a way to reducing the likelihood of failure. The measure has yet to see movement.

The Fed is already moving banks toward higher capital buffers with its annual stress tests.

Senator Elizabeth Warren, a Democrat from Massachusetts, and John McCain, a Republican from Arizona, also have introduced a bill aimed at re-creating the Glass-Steagall Act, the Depression-era measure that separated commercial and investment banking.

Assuming Yellen makes no missteps in the hearing, she is likely to go on to win confirmation from the full Senate, and replace Bernanke, whose term expires Jan. 31, said Robert Shapiro, chief executive officer at Sonecon LLC, an economic advisory firm in Washington, and a former Commerce Department official under President Bill Clinton.

“I don’t think that there is going to be any broad Senate Republican resistance to her,” Shapiro said. “They’ve been burned for putting the economy at risk through the shutdown and the debt limit. I just don’t think they want to be subject to that attack again, and that’s certainly what the Democrats and the White House would say.”

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