Sen. Elizabeth Warren’s latest effort to place new rules on Wall Street is drawing scrutiny from a unexpected source: Former Federal Reserve Chairman Ben Bernanke.
The former top regulator on Friday criticized new legislation introduced by Warren and Louisiana Republican Sen. David Vitter, saying that the bill to limit the Fed’s ability to bail out troubled banks would only cause more trouble during times of financial distress.
The senators’ “approach is roughly equivalent to shutting down the fire department to encourage fire safety,” Bernanke wrote on his personal blog for the Brookings Institution, where he is a fellow.
The Warren-Vitter bill would require that any institution that receives a Fed emergency loan must demonstrate that they’re insolvent and that the loans carry a steep penalty interest rate.
The senators argue that the 2010 Dodd-Frank financial reform law did not go far enough to limit the government’s power to offer bailouts.
Bernanke, however, argued that the law did too much to limit regulators’ response to a crisis situation, saying that some of its provisions were “unwise” even if their inclusion was necessary to pass the legislation.
He cited the possibility that the stigma of demonstrating insolvency and taking a penalty loan from the Fed could cause a panic among a bank’s investors, referring to the 2007 failure of the British firm Northern Rock after it was revealed that the firm was relying on emergency lending from the Bank of England.
It is “puzzling that she would propose legislation to overturn one of the key legislative bargains” in Dodd-Frank, Bernanke wrote of Warren, who is the top congressional critic of Wall Street practices and a defender of Dodd-Frank’s new rules.
Vitter pushed back against Bernanke’s criticism Friday. “The Fed’s past abuse of emergency lending demands reforms,” Vitter said in a response provided by his office. “Is anyone surprised that the mastermind of the taxpayer funded bailouts for the megabanks wants to protect the ability to keep bailing them out?”
After starting his blog earlier this year, Bernanke has not shied away from engaging in debates with prominent officeholders, academics and public figures. Past targets have included the Wall Street Journal editorial page, the German government and even current Fed Chairwoman Janet Yellen.
