Bernanke slams Warren's Fed lending legislation

Former Federal Reserve Chairman Ben Bernanke on Friday decried recently proposed legislation that would limit the U.S. central bank's lending authority during a financial crisis, adding to the recent criticism of the bill's sponsor, Sen. Elizabeth Warren.

The Bailout Prevention Act—a bipartisan bill introduced Wednesday—would seek to curb risk-taking from large banks by removing some of the Fed's ability to bail them out. In a blog post, Bernanke contended the measure would "imprudently limit the Fed's ability to protect the economy" and prevent contagion from firms' failure.

Former Federal Reserve Chairman Ben Bernanke (L) and Sen. Elizabeth Warren (R).
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Former Federal Reserve Chairman Ben Bernanke (L) and Sen. Elizabeth Warren (R).

During the 2007-2009 financial crisis—when Bernanke served as Fed chair—the central bank made loans to Bear Stearns and AIG with "reluctance" to prevent further panic, he said.

"This lending, all of which was repaid with interest, was essential for stabilizing the financial system and restoring the flow of credit," Bernanke wrote.

Vocal Wall Street critic Sen. Elizabeth Warren, D-Mass., co-authored the Bailout Prevention Act. In a Wednesday release, she contended that the Fed's presence as a safety net could lead large banks to carelessness.

"If big financial institutions know they can get cheap cash from the Fed in a crisis, they have less incentive to manage their risks carefully — which further increases the chance of another financial crisis," Warren said.

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In response to Bernanke, bill co-author Sen. David Vitter, R-La., told CNBC, "Is anyone surprised that the mastermind of the taxpayer funded bailouts for the megabanks wants to protect his ability to keep bailing them out?"

The bill would make "common sense reforms to the Fed's emergency lending powers," Vitter said in a Wednesday release.

Warren's office did not immediately respond to a request to comment.

Bernanke's criticism of Warren's bill comes as the outspoken senator butts heads with President Barack Obama over trade policy. She has repeatedly criticized the Obama-backed fast-track trade promotion authority (TPA) for international trade negotiations.

Among other qualms, Warren has raised concerns about environmental and labor regulation enforcement. Speaking at a news conference Thursday, Obama said policy disagreements with Warren were not personal.

The Senate voted on Thursday to give Obama negotiating freedom for an 11-nation Pacific trade deal.