Greg Ip

Articles by The Economist’s U.S. Economics Editor

Oversight of the Federal Reserve: Unwelcome attention

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The original story is linked here.

Jul 16th 2009 | WASHINGTON, DC
From The Economist print edition

Congress threatens the central bank’s independence

 
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WHEN Ron Paul ran for president in 2007, he was gratified to hear students at one of his rallies start chanting “End the Fed”, while setting dollar bills alight. Though the Texas congressman’s pursuit of the White House ended in failure, his campaign against the central bank is gaining some adherents.

Mr Paul has introduced a bill that would give the Government Accountability Office (GAO), the non-partisan investigative arm of Congress, the right to inspect the Federal Reserve, including its conduct of monetary policy, its lending and its relations with foreign central banks, all of which are now off-limits. Sixty percent of the members of the House of Representatives have signed on as co-sponsors.

The bill’s proponents defend it as nothing more than a push for transparency and accountability. But that is disingenuous; Mr Paul has long campaigned for the Fed’s abolition. Short of that, the danger is that Congress would use GAO audits to hammer the Fed for doing unpopular things—tightening monetary policy, for instance. The bill thus weakens the Fed’s cherished and vital independence, and its vice-chairman has warned that it could unsettle the markets and so lead to higher interest rates.

Since 2008 the Fed has lent to firms previously ineligible for its credit and bought up government bonds with newly printed money. Although almost certainly saving the economy from an even worse mess than it is now in, those actions have reawakened a long-dormant streak of scepticism towards the central bank. Americans and Congress are upset about reckless bankers, failed regulators and bail-outs. The Fed makes a proxy for all three.

The unease cuts across party lines. Mr Paul is a conservative Republican, but a third of his co-sponsors are Democrats. The sponsor of the Senate’s version of the bill is the only socialist in Congress, Bernie Sanders of Vermont. Republicans fiercely oppose Barack Obama’s proposal that the Fed should oversee the largest, most systemically important financial firms; they think it would compromise the Fed’s attention to low inflation. Democrats who shrink from criticising their own president can attack the Fed over bank bail-outs.

Mr Paul’s bill is unlikely to become law. The Democratic leadership does not support it and few senators have signed on. But it may affect Congress’s appetite for expanding the Fed’s powers as much as Mr Obama would like. The Fed could face restrictions on its emergency lending authority or be required to disclose more about its lending operations. (It has already boosted disclosure and allowed more GAO scrutiny.) Less likely, but more serious, its structure could be revamped: the role of private bankers may be reduced or reserve bank presidents may need Senate confirmation.

Whatever the outcome, the increased scrutiny has unpleasant implications for the Fed, argues Tom Gallagher of ISI Group, a broking firm. It suggests diminished, though still favourable, odds that Ben Bernanke will be reappointed as the Fed’s chairman when his term ends on January 31st next year; greater caution by the Fed in using its balance-sheet to prop up the financial system; and more doubt about whether the Fed will be able to tighten monetary policy soon enough in the face of political resistance.

Mr Bernanke, keen to show sympathy for ordinary people’s worries, will hold a televised “town hall” meeting on July 26th in Kansas City. He will need all the goodwill he can get. Mr Paul has turned his campaign’s “End the Fed” chant into the title of a book to be published in September. “The Federal Reserve should be abolished because it is immoral, unconstitutional, impractical, promotes bad economic policy and undermines liberty,” he writes. His sometimes rambling polemic is unlikely to win many adherents on Capitol Hill. But if a decent share of Mr Paul’s donors, who he claims number more than 300,000, buy a copy, it will become a bestseller.

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Written by gregip

July 16, 2009 at 12:45 pm

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