The Fed's strategy in dealing with the Libor scandal is clear: Pass the buck early and often.
Federal Reserve Chairman Ben Bernanke followed that playbook to the letter in testimony Tuesday at the Senate Banking Committee, repeatedly telling lawmakers that the Fed had done all it could to respond to evidence that banks were manipulating a key interest rate. The primary responsibility for dealing with Libor, he said, rested with the British regulators and banks.
That approach didn't fly far, however, as lawmakers from both sides of the aisle set aside partisan differences to hammer Bernanke together over the Fed's inaction. They wondered why the Fed didn't warn the public of its concerns about the Libor rate, on which so many borrowing costs, including mortgages and business loans, are based.
Even today, Bernanke still doubts that Libor is a reliable borrowing measure: "I can't give that assurance with full confidence," Bernanke said in response to a senator's question.
Bernanke admitted that the Libor scandal is "undermining public confidence in banks and financial markets." But he also passed the blame For Libor's lingering problems to the British trade group in charge of Libor: "The British Bankers Association did not adopt most of the suggestions that were made by the Federal Reserve Bank of New York," he said.
The primary purpose of Bernanke's appearance was to deliver the Fed's semiannual monetary policy report to Congress.
In his remarks, Bernanke said that the economy appeared to have "decelerated" recently, with signs of slower hiring, consumer spending and economic growth. He said the Fed had cut its forecast for GDP growth this year to a range of between 1.9 percent and 2.4 percent, from a forecast in February of 2.4 percent to 2.9 percent.
The Fed also raised its forecast for the unemployment rate by the end of the year to between 8.2 percent and 8 percent, up from a range of between 8 percent and 7.8 percent. Fed policy makers think unemployment will still be between 7 percent and 7.7 percent at the end of 2014 -- a dismal prospect for the economy.
And yet Bernanke offered little hope that the Fed would take further action to help the economy, promising only that the Fed still had ammunition it could use, and that it stood ready to use it if unemployment did not fall.
Many of the hearing's questions, however, were about the Libor scandal. Senate Banking Committee Chairman Tim Johnson (D-S.D.) kicked the hearing's Q&A session off with a Libor question, in fact, asking Bernanke: "What did you know, when did you know it, and what did you do" about banks manipulating Libor.
Bernanke recited many of the events detailed by the New York Fed last week, when it released documents showing its response to the Libor scandal. He said the Fed warned regulators in the U.S. and U.K. about their concerns about Libor, including the memorandum written by then-New York Fed chief Timothy Geithner in May 2008 with six suggestions for making Libor more reliable (all proposed by banks, incidentally).
Bernanke said the New York Fed's actions triggered regulatory investigations into the scandal on both sides of the Atlantic, leading to the recent $450 million settlement by Barclays over Libor manipulation charges. Many more banks are still under investigation and will likely pay large settlements to regulators, too.
Bernanke's testimony was somewhat contradicted by testimony earlier on Tuesday by his counterpart at the Bank of England, Mervyn King, who said the New York Fed showed him no evidence of Libor manipulation. Then again, the Bank of England and other British regulators are involved in a furious game of buck-passing themselves.
Ultimately, Bernanke's message was that Libor is a British problem, to be solved by British regulators and banks. That answer did not satisfy Senators David Vitter (R-La.), Pat Toomey (R-Penn.) or Jeff Merkley (D-Ore.), each of whom pressed Bernanke on why the Fed did not do some things that were clearly in its power.
For example, why didn't the Fed come down hard on U.S. banks suspected of involvement in the Libor scandal -- namely, JPMorgan Chase, Bank of America and Citigroup -- and why didn't it warn the public about Libor's unreliability?
He did not directly address the first question, aside from pointing out that the U.S. banks are under investigation in the scandal. On the second question, Bernanke suggested that Libor manipulation was public knowledge, with outlets such as the Wall Street Journal and Financial Times doing the central bank's job for it -- "the press was full of stories about it."