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by Don Azarias
January 21, 2011
Suddenly, most of the American taxpayers, critics, Monday morning quarterbacks, naysayers, second-guessers and fault-finders are throwing everything, including the proverbial kitchen sink, at the Federal Reserve. Some congressional lawmakers are up in arms demanding that the Fed be stripped of its regulatory powers over banks and be subjected to audits of its behind-the-scenes operations.
The Federal Reserve is an independent agency of the United States federal government created by the Federal Reserve Act, an act of Congress that was signed into law by President Woodrow Wilson on December 23, 1913. Congress intended this to be an independent government agency in order to keep politics out of monetary policy. Congress has a supervising role, but does not interfere on a daily basis. The chairman of the Federal Reserve reports to Congress biannually, but usually works closer with the Department of the Treasury and the president of the United States. The Federal Reserve is independent of other branches and agencies of government. It is self-financed and, therefore, is not subject to the congressional budgetary process. Like any other independent federal agencies, however, the Federal Reserve’s independence could be revoked by Congress, at any time, if Congress wishes to.
The chairman of the Federal Reserve Board, Ben Bernanke, has now become the poster boy for criticism and second-guessing, usually over interest rate actions. But this time, the criticism is much broader as Congress responds to widespread public anger that the Fed bailed out Wall Street but not ordinary Americans, who are unemployed and are losing their homes and with the unemployment rate hovering around double digits.
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 is now finding itself caught between a rock and a hard place. The chairman of the Federal Reserve is concerned that congressional efforts at financial reform could weaken the central bank’s ability to handle future crises and may politicize monetary policy. Bernanke had this to say, “The Fed played a major part in arresting the crisis. It might have been distasteful and unfair but were needed to avoid a global economic catastrophe rivaling the Great Depression. My colleagues at the Federal Reserve and I were determined not to allow that to happen.”
It’s my personal opinion that the Fed’s ability to set interest rates and provide stimulus through lending and asset-purchase programs depends upon being able to operate independently of political influence. Opening monetary policy decisions to the scrutiny of Congress would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation. There is a strong case for a continued role for the Federal Reserve’s expertise needed to supervise highly complex financial firms. The ”stress tests” being done on banks helped restore public confidence in the banking system. And, for all his faults and shortcomings, I find Bernanke’s stance on this matter unassailable.
Many economists and Fed watchers say congressional efforts to rein in the Fed’s powers could interfere with the central bank’s ability to help guide the fragile economy to recovery. The Fed’s very independence and its unique ability among U.S. institutions enabled it to act quickly to stabilize the nation’s financial system during the Great Recession.
David M. Jones, a former Fed economist and president of DMJ Advisors, a Denver-based consulting firm had this to say, ”It might have been the Fed’s finest moment when it had to jump into the market. 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 Fed’s aggressive intervention also set the stage for the current criticism. Many lawmakers question whether the Fed’s bailout plan 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 (AIG). Of course, congressional lawmakers will turn the volume of the noise louder and louder in order to capture populist’s sentiments for their own personal gain. Never mind that the Federal Reserve was created as an independent federal government agency. Never mind that the Federal Reserve made the right decision in bailing out the behemoth AIG. One thing is being made perfectly clear to us, American voters: Those congressional lawmakers are only looking for their own good and not the nation’s.
The House is proposing a legislation to subject the Fed to intense scrutiny by the Government Accountabilty Office (GAO), Congress investigative agency. The bill would authorize Congress to audit not only the Fed’s lending programs but its basic decisions to set monetary policy by raising or lowering interest rates. On the other side of Capitol Hill, senatorial lawmakers are proposing 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.
It’s my firm belief that the Federal Reserve should remain independent and apolitical as intended by Congress and should not be reined in by the same institution whose members have a bad habit of playing politics especially during election time. Acting for the good of the economy, any policy and standards set forth by those brilliant economists and experts from the Fed should be the paradigm. And that Congress should refrain from interfering with the Fed’s business. Instead, those congressional lawmakers should start cleaning up their own mess by eliminating their pork-barrel spending. They should stop fraternizing with special interest groups in exchange for campaign contributions. They should also work longer hours and figure out how to balance the federal budget. For a group of public servants who are being rewarded with generous monetary compensation, premium health care insurance, liberal retirement and pension benefits and a lot of other perks, courtesy of American taxpayers, that’s not asking too much. Is it?