Suddenly the Federal Reserve is everybody’s punching bag.
Strip the Fed of its bank regulation powers, some in Congress are demanding. Get probing audits of its behind-the-scenes operations, others say.
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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 the central bank’s job was to yank away the punchbowl just when everybody was starting to party. And though 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 year’s midterm elections.
Fireworks seem likely at Senate confirmation hearings early next month on President Obama’s nomination of Bernanke to a second four-year term as chairman.
The Fed’s 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 nation’s financial system after it froze up last September following the bankruptcy of the Lehman Brothers investment house, Fed backers say.
The Fed’s aggressive intervention also set the stage for the current criticism. Many lawmakers question whether the Fed’s 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.
“In the past, the Federal Reserve was held in very high esteem,” said Rep. Ron Paul, R-Texas, author of the best-seller “End the Fed” and darling of skeptics of Washington. Now, it’s “the source of our problem.”
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 Paul’s approach 43-26 last week over objections from its chairman, Rep. Barney Frank, D-Mass.
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. Paul has been introducing a version every year since the early 1980s, but this is the first time it has garnered any serious attention.
