- Associated Press - Thursday, July 15, 2010

WASHINGTON (AP) — Janet L. Yellen, the president’s pick to be the second-highest ranking official at the Federal Reserve, acknowledged Thursday that regulators were slow to crack down on risky banking practices that stoked the 2008 financial crisis.

Testifying before the Senate Banking Commitee, Ms. Yellen, president of the Federal Reserve Bank of San Franciso, described banking oversight at that time as “insufficient” and “weak.” Beefing it up is a key focus for the central bank, she said. A lesson learned, she said, was how hard it was “for all the regulators involved to take away the punchbowl in a timely way.”

Sarah Raskin, a Harvard-educated lawyer who is the Maryland commissioner of financial regulation and is a nominee for a position on the Fed board, agreed with the assessment.

Ms. Raskin also suggested that the Fed didn’t pay sufficient attention to a booming housing market that eventually went bust, taking the economy down with it. “I think the extent of the housing bubble was not appropriately monitored or taken seriously,” she said.

Going forward, she suggested the Fed needs to pay more attention to curbing such speculative excesses.

The panel is considering President Obama’s nominations of Ms. Yellen, Ms. Raskin and Peter Diamond, an economist at the Massachusetts Institute of Technology, at a crucial time for the economy.

The Fed is trying to steer the fragile economy into a lasting recovery. The nation has suffered the worst recession since the Great Depression, and the economy is vulnerable to shocks.

At the same time, the Fed will play a leading role in implementing Congress‘ overhaul of financial regulations, which is moving closer to becoming law.

As vice chairwoman, Ms. Yellen’s duties would include helping build support for policy positions staked out by Fed Chairman Ben S. Bernanke, who began a second term in February.

“Over the next few years, the Fed must craft policies that ensure that our economy accelerates its progress along the recovery path it has begun to trace,” Ms. Yellen testified. “With unemployment still painfully high, job creation must be a high priority of monetary policy,” she said.

The unemployment rate is 9.5 percent. The Fed has said it will take five or six years to bring the economy and the employment closer to normal health.

Ms. Yellen is considered a dove on monetary policy. That means she would be expected to be concerned more about high unemployment than about rising inflation.

Still, she told lawmakers that once the recovery is fully entrenched, the Fed must be prepared to start boosting record-low interest rates “in a careful and deliberate fashion” to avoid any inflation threats.

And, Ms. Yellen said, the Fed must do its best to avoid another financial crisis like the devastating one in 2008. “We have learned a harsh lesson about the dire consequences a financial crisis has for ordinary Americans in the form of lost jobs, lost homes, lost wealth and lost businesses,” she said. “Those of us charged with overseeing the financial system should always keep this human cost in mind,” she added

Lawmakers in Congress and others have blamed the Fed for lax regulation, failures to crack down on dubious lending practices and missing signs of risks, which all factored into the crisis.

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