WASHINGTON — The administration's choices to fill three seats on the Federal Reserve Board acknowledged past mistakes by the central bank and the mammoth job for regulators to repair the financial system.
Facing questions from the Senate Banking Committee Thursday, the three nominees said the Fed overlooked clear threats in the time before the financial crisis, and they highlighted challenges the central bank will face with its powers enhanced by Congress' regulatory overhaul.
"We missed critical elements that caused the crisis to be as severe as it was," said Janet Yellen, the president of the Federal Reserve Bank of San Francisco and the nominee to succeed Vice Chairman Donald Kohn on the Fed board. "Regulators, including the Fed, should have taken steps earlier."
In addition to Yellen, the banking panel is considering the nominations of Peter Diamond, a Massachusetts Institute of Technology professor, and Sarah Bloom Raskin, Maryland's commissioner of financial regulation, to fill the other two openings. Their nominations are expected to move swiftly, despite having languished in the Senate for more than a year.
Looking back at the causes of the crisis, Yellen, a White House economic adviser during the Clinton administration, said regulators "failed to understand just how seriously mortgage underwriting standards had declined, the complexity of securitization and what was triggered by the housing price decline."
Raskin agreed, saying the central bank should have paid more attention to the gathering risks through its monetary policy role.
"The extent of the housing bubble that was developing was not appropriately monitored or taken seriously," she said.
But despite the central bank's failings, the Fed is to keep its powers and gain new ones under the regulatory overhaul legislation. (The Senate approved a final version of the bill later in the day, and President Obama is expected to sign it next week.)
The bill would require the Fed, among other duties, to complete new regulations on capital and liquidity within 18 months of enactment, conduct annual stress tests for systemically important companies and adopt a ban on proprietary trading by banks.
The panel's lawmakers warned the nominees they face a huge task to shepherd a recovering economy while implementing the most sweeping regulatory changes since the 1930s.
"Put simply, the Federal Reserve is at the forefront of maintaining financial stability," said Banking Committee Chairman Christopher Dodd, a primary author of the legislation.
"Congress is entrusting the Federal Reserve with tremendous responsibilities — all of which the Fed has sought," the senator said. "Now the Fed must step up and use these new powers to serve the greater good."
The nominees concurred but said the job will not be easy.
"We have enormous responsibilities given to us under this legislation," Yellen said.
Diamond, an expert on Social Security and taxation, said the recent turmoil and legislative debate proved the Fed has already been wearing numerous hats.
"The experience[s] of the recent financial crisis and financial reform legislation have underlined the multiple jobs the Fed has in working to fulfill the dual mandate of high employment and price stability," he said. "The Fed will have major work to do to implement the tasks that the legislation is placing at the Fed," he said.
