Bernanke, Time's Person of Year, Urges Bank Lending (Update1)

c.2009 Bloomberg News

(Adds comment by Mishkin in eighth paragraph.)

Dec. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, named "Person of the Year" by Time magazine today, said the central bank is "strongly encouraging" more lending by banks that are still recovering from the financial crisis.

"We have a lot to do to get the economy back to stability, get jobs created," Bernanke told the publication in a Dec. 8 interview, published today. While banks have been "stabilized," firms are not lending enough to support a "healthy recovery," he said.

Bernanke, the first Fed chief to get the magazine's honor that dates to 1927, led the biggest expansion of the central bank's power in its 95-year history to battle the worst economic slump since the Great Depression. After the government let Lehman Brothers Holdings Inc. fail in 2008, every large financial firm was in danger of bankruptcy, Bernanke said.

There were "weaknesses" in regulators' bank supervision and in firms' own risk management, Bernanke said. "We need to have extensive reform in the private sector, in the public sector, to eliminate these risks in the future," he said.

The 56-year-old Fed chairman said that following taxpayer bailouts of financial institutions bankers should show restraint in compensation. Addressing firms so large they are viewed as "too big to fail" is "one of the biggest problems we face in this country," he said.

'Some Restraint'

"We have a situation still where the government is either directly or indirectly providing some protection or help to many large financial institutions," Bernanke said. "And with that recognition, I think that bankers ought to exercise some restraint in their pay decisions."

The Senate Banking Committee is scheduled to vote tomorrow on whether to recommend to the Senate that Bernanke be confirmed to a second four-year term. At least four senators are trying to block or delay a floor vote in the full Senate. Bernanke's term expires Jan. 31, and he can continue to serve as chairman after that without Senate confirmation.

"This is a man who has displayed incredible courage during this episode, and also stayed calm," Frederic Mishkin, a former Fed governor who now teaches at Columbia University in New York, said in an interview on Bloomberg Television.

The Fed chief and his colleagues on the Federal Open Market Committee are holding a two-day meeting on monetary policy and will release a statement at about 2:15 p.m. Economists said the Fed will probably leave the benchmark interest rate near zero and retain a pledge to keep rates low for an "extended period."

'Very Powerful'

"There are not easy solutions" for stimulating the economy, Bernanke said in the interview, published on Time's Web site. It would be "very powerful" for the Fed, Obama administration and Congress to support lending to firms and especially small businesses, he said.

The Fed chairman said that, given his knowledge of the Great Depression, he recognized the high stakes as the financial crisis unfolded.

"I shudder to think what the world would be like if Ben hadn't been running the Fed," former Treasury Secretary Henry Paulson, who coordinated the government's crisis response in 2008 with Bernanke, told Time. "It's just hard to explain that yes, we're in deep doo-doo, but we would have been in much deeper doo-doo."

Jobless Rate

The jobless rate climbed to 10 percent in November from 8.9 percent in April. In updated forecasts last month, Fed policy makers projected a decline to a range of 9.3 percent to 9.7 percent in the fourth quarter of 2010.

"I expect the unemployment rate to come down over a period of time," Bernanke said. "We don't, at this point, have any reason to believe that long-term unemployment -- the unemployment rate -- will be higher in the long term than it has been in recent years."

While banks haven't yet tried to lend out the reserves that have accumulated from the Fed's $1 trillion in purchases of mortgage-backed securities, the Fed will eventually have to "pull those reserves out of the system," Bernanke said. "We don't have to do that yet, but when the time comes, we have tools to do that."

The interview, delving into Bernanke's personal finances, quoted him as saying he and his wife refinanced a few months ago out of an adjustable-rate mortgage on their Capitol Hill home that had "exploded." The couple took on a 30-year fixed-rate mortgage of "a little over 5 percent," he said. Bernanke's "ride" is a Ford Focus.

Opened Wallet

Bernanke opened his wallet to the Time interviewers, showing an American Express credit card and a card from men's suit retailer Jos. A. Bank Clothiers Inc. and counted $85 in cash. He said Treasury Secretary Timothy Geithner plays a "very good" game of tennis, sometimes against President Barack Obama. Bernanke said he hasn't played basketball with the president.

Bernanke leads the "most-powerful, least-understood government force shaping our lives," Managing Editor Richard Stengel said while announcing the choice on NBC's "Today" show.

There were six finalists for "Person of the Year," including U.S. President Barack Obama; House Speaker Nancy Pelosi; Steve Jobs, Apple Inc.'s co-founder and chief executive officer; the Chinese worker, an "increasingly influential group;" General Stanley McChrystal, the top U.S. and NATO commander in Afghanistan; and Jamaican sprinter and Olympic gold-medalist Usain Bolt.

Bernanke is a "controversial figure" who has been criticized by both conservatives and liberals for "being King Ben, running the unelected fourth branch of government," Stengel said. The magazine is owned by Time Warner Inc.

For Related News and Information: Federal Reserve links: FED Credit crunch page: WWCC Fed balance-sheet figures: ALLX FARW Government relief programs: GGRP Fed monetary policy: FOMC Fed Web links: FRBM Central bank rates worldwide: CBRT