Analysis: Fed Beneith Fire as Public Anger Mounts
Strip the Fed of its bank regulation powers, some in Congress are demanding. Get probing audits of its behind-the-scenes operations, others say.
The chairman of the Federal Reserve Board is always fair game for criticism and second-guessing, usually over interest rate actions. But this year the criticism is much broader as Congress responds to widespread public anger that the Fed bailed out Wall Street but not ordinary Americans, and with unemployment in double digits.
Former Fed Chairman William McChesney Martin Jr. famously said that the central banks job was to yank away the punchbowl just when everybody is starting to party. And while Fed Chairman Ben Bernanke has signaled the Fed will keep interest rates low for now, a round of higher rates inevitably will come.
The Fed finds itself both the punchbowl keeper and the punching bag. Imagine the outcry when it does begin to crank up rates – perhaps just ahead of next years midterm elections.
Fireworks seem likely at Senate confirmation hearings early next month on President Barack Obamas nomination of Bernanke to a second four-year term as chairman.
Many economists and Fed watchers say congressional efforts to rein in the Feds powers could interfere with the central banks ability to help guide the fragile economy to recovery.
The Feds very independence and its unique ability among U.S. institutions to create money out of thin air enabled it to act quickly to stabilize the nations financial system after it froze up last September after the bankruptcy of the Lehman Brothers investment house, Fed backers say.
“It might have been the Feds finest moment when it had to jump into the market,” said David M. Jones, a former Fed economist and president of DMJ Advisors, a Denver-based consulting firm. “We still have to wait to see how effective the Fed is in its exit strategy and whether it can keep inflation in check. But this badgering by Congress, even if there is populist sentiment, is inappropriate.”
The Feds aggressive intervention also set the stage for the current criticism. Many lawmakers question whether the Feds money machine has mainly benefited financial markets and not the broader economy. Lawmakers are also peeved that the central bank acted without congressional involvement when it brokered the 2008 sale of failed investment bank Bear Stearns and engineered the rescue of insurer American International Group.
Bernanke, first appointed by President George W. Bush, has worked closely with both Treasury Secretary Timothy Geithner and Bush Treasury Secretary Henry Paulson in confronting the worst financial crisis in decades. Geithner also has gotten his share of congressional wrath, mainly for his administering of the $700 billion bank bailout fund.
“In the past, the Federal Reserve was held in very high esteem,” said Rep. Ron Paul, R-Texas, a libertarian who twice ran quixotic presidential campaigns and remains a darling of skeptics of Washington. Now, its “the source of our problem,” suggests Paul, author of the best-seller “End the Fed.”
Usually an outlier, Paul suddenly has found an army of at least 307 House colleagues and 30 senators marching behind his legislation to subject the Fed to intense scrutiny by Congress Government Accountability Office. The House Financial Services Committee endorsed Pauls approach 43-26 last week over objections from its chairman, Rep. Barney Frank, D-Mass.
Senate Banking Committee Chairman Chris Dodd, D-Conn., who will preside over Bernankes confirmation hearings, has proposed legislation that would strip the Fed of its bank-regulation authority and give the Senate a role in selecting the 12 regional Federal Reserve bank presidents.
Dodd says his measure would return the Fed to its core mission of setting monetary policy, claiming it proved itself “an abysmal failure” by not cracking down on risky lending practices that led to the financial meltdown.
Dodd is in an extremely tight battle for re-election, even though he has served in Congress for 35 years.
“I dont think it ever hurts to have a member of Congress stand up and denounce the Fed. There is a lot of anger out there, and this is basically a therapeutic gesture,” said Ross Baker, a political scientist at Rutgers University.
Still, Baker said, it probably isnt wise to tamper with the formula that makes the Fed “very much an anomaly in American government. Its independent, it has to be. You dont want the Fed to be under the control of the president. And it kind of sits out there – not in the executive branch, not in the legislative branch, not in the judicial branch. Sort of its own little element in the separation-of-powers constellation.”