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.
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.
Co-author Sen. David Vitter, R-La., in a release said the bill would make “common sense reforms to the Fed’s emergency lending powers.”
Neither Warren nor Vitter’s offices immediately responded to requests to comment.