Politics and the Fed; Board's Independence Hangs in the Balance

The Washington Times (Washington, DC), June 15, 2009 | Go to article overview

Politics and the Fed; Board's Independence Hangs in the Balance


Byline: Alfred Tella, SPECIAL TO THE WASHINGTON TIMES

The threat of politicization hangs over the Federal Reserve Board like the Sword of Damocles. It's Capitol Hill's response to the Fed's proliferation of new programs to unglue credit markets. The Fed's innovations threaten to create enough acronyms to tax the limits of the alphabet.

Rep. Barney Frank, Massachusetts Democrat and chairman of the House Financial Services Committee, which oversees the Federal Reserve, has warned, There is a problem with too much power going to an entity that is not subject to democratic powers. The Fed should be accountable to voters.

Rep. Ron Paul, Texas Republican, has authored a Fed transparency bill calling for Fed audits. The bill has more than 200 co-sponsors, and the number is rising daily. It's just a first step, Mr. Paul says.

Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate Banking Committee, which shares oversight responsibilities for the Federal Reserve System, also wants more Fed transparency as well as an evaluation and closer scrutiny of regional Federal Reserve banks.

Questions have been raised about the location of the regional banks and whether they should be more evenly distributed around the country and whether Senate confirmation should be required of Federal Reserve Bank presidents. Some in Congress are angry because the Fed won't name the companies participating in its programs. And if the Fed gets new regulatory powers over the financial economy, that will inspire yet more attacks on its independence.

Some observers say the Fed already has slipped over the edge politically. The innuendo in German Chancellor Angela Merkel's recent remarks was telling when she said, We must return together to an independent central-bank policy.

The Fed's political conundrum has become deadly serious, and the stakes are high. Fed Chairman Ben S. Bernanke knew the risks when he and his colleagues on the Federal Open Market Committee (FOMC) embarked upon a bold new scheme to unlock credit flows, but they believed the risks were unavoidable. Financial markets were frozen, the economy was in deep trouble, and the Fed policymakers became convinced that bold new programs were essential to provide liquidity and stimulate economic growth.

Almost overnight, the macroeconomic Fed became the microeconomic manager, involving itself in the destinies of individual businesses, such as Bear Stearns Cos. Inc., Merrill Lynch & Co. Inc., American International Group Inc. and Citigroup Inc. Did the Fed go too far? Some analysts say yes and argue that at least part of the Fed's cleanup work could have been handled by the Treasury Department.

There's no question: Politicization of our nation's central bank will seriously damage the effectiveness of monetary policy, the very heart and soul of the Fed's mission. …

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