The Federal Reserve under attack: Poked by pitchforks
From The Economist print edition
Curbs on the Fed’s independence are advancing through Congress
[Greg Ip] POPULISTS and bankers have been at odds since America’s earliest days. Its first two central banks were shuttered in the 19th century in part because of their perceived closeness to financiers. In the wake of the financial crisis those tensions have bubbled back to the surface. The central bank is again in the cross hairs.
On November 19th the financial services committee of the House of Representatives voted—over the objections of its chairman, Barney Frank—to add a provision to a regulatory overhaul that would subject the Federal Reserve to examination by Congress’s investigative agency, the Government Accountability Office. Congress gave the GAO authority to audit the Fed in the 1970s, but exempted its monetary-policy and lending decisions. The new provision, pushed by Ron Paul, a conservative Texas Republican and Alan Grayson, a populist Florida Democrat, would eliminate the exemption. This could make the Fed less effective as a lender of last resort by making banks reluctant to borrow for fear that an audit would disclose their identity, and the Fed might become warier of raising interest rates for fear of one.
The animus towards the Fed is striking, considering that its unprecedented market interventions almost certainly averted a financial meltdown last year and a far more severe recession. But many congressmen care less about the disaster avoided than the injustice of bailed-out bankers taking home record bonuses as unemployment keeps rising. The Fed is now guilty by association, seen as too close to banks, too quick to bail them out and too generous and secretive when it does so. The Fed’s structure supplies fodder for this critique. The compromise that led to its creation in 1913 split responsibility for monetary policy between politically-appointed governors in Washington, dc, and the presidents of 12 regional banks, whose boards are appointed in part by private bankers.
The Fed and the Treasury now face the delicate task of trying to excise the Paul-Grayson provision from a regulatory overhaul they dearly want, in particular because it would create a process for avoiding future ad-hoc bail-outs. Their best hope is that the provision dies when the House bill is merged with one from the Senate. Chris Dodd, chairman of the Senate Banking Committee, has beaten back demands from senators in both parties for a similar provision. Mr Dodd’s own bill, though, is far from Fed-friendly. He would strip the Fed of its bank regulatory responsibilities and erode its independence by eliminating private bankers’ say in appointing regional Fed bank boards, and making the chairmen of those boards political appointees.
Ben Bernanke, the Fed chairman, has so far been personally spared the vitriol and seems likely to win a second four-year term; the Senate will hold a confirmation hearing on December 3rd. Tim Geithner, the treasury secretary, has been less fortunate. In his previous job as the New York Fed president he was at Mr Bernanke’s side for most of the bail-outs. A handful of congressmen have called (fruitlessly) for him to be fired. One of America’s great strengths, so Mr Geithner dryly remarked, is that anyone can criticise his decisions with the benefit of hindsight.
The original story is linked here.