Here’s an excerpt from an interesting article in The Econonist on the Federal Reserve.
Mission creep at the Fed
Excerpt: "In a special section marking the anniversary of the credit crunch, we start with the Federal Reserve. Its creative response to the crisis may have staved off catastrophe, but may also have put its independence at risk
WHEN he was still in academia, Ben Bernanke once argued that Franklin Roosevelt’s greatest contribution to ending the Great Depression was not a specific policy, but his “willingness to be aggressive and to experiment…to do whatever it took to get the country moving again.” That would fairly describe how Mr Bernanke has battled perhaps the biggest financial crisis since FDR’s time, which erupted one year ago this week.
The chairman of the Federal Reserve has cast aside any notion that central bankers should be boring. He has slashed interest rates; rolled out a dizzying array of new lending programmes; backed the debt of Bear Stearns, a failing investment bank; agreed to lend to Fannie Mae and Freddie Mac, America’s troubled, quasi-private mortgage agencies; argued for fiscal stimulus and mortgage write-downs; and proposed an expansion of the Fed’s regulatory domain.
The Fed did not seek its bigger role, but acted because no one else could. Mr Bernanke is now consumed with responsibilities he never imagined when he became chairman in early 2006. Since the crisis broke, he has been at his desk seven days a week, fuelled by cans of Diet Dr Pepper from a small refrigerator in his office. Even if his aggression and experimentation do not prevent a recession, they have softened the impact of falling house prices, rising default rates and the credit squeeze on America’s economy. But they have also created new political risks for the Fed.
The central bank is lending to private companies on an unprecedented scale and is thus making decisions it long sought to avoid about the allocation of credit. It is also acquiring new powers of oversight. Politicians could chafe at the Fed’s power: why, they might ask, should unelected officials choose who benefits from taxpayers’ money? And they might press the central bank to pursue political ends—such as propping up favoured borrowers—that interfere with monetary policy.
Events beyond the Fed’s control magnify these risks. Unemployment and inflation are likely to remain uncomfortably high for the next year or two; such a combination has fuelled political antagonism in the past. And the next president will have an instant opportunity to fill three seats on the Fed’s seven-member board of governors (one is vacant; another soon will be; a third governor’s term has expired). He and Congress will have a chance to shape the Fed’s priorities on both regulation and monetary policy.
So far there is no congressional clamour to rein in the Fed, and Mr Bernanke thinks its monetary independence is safe. “We’ve been able to keep a good separation between monetary policy and these other areas,” he told Congress last month. But his predecessors worry, nonetheless. Paul Volcker urged Congress in May that if it wanted to prop up favoured sectors, it should do so transparently, not through the Fed. “That’s the way to destroy the Federal Reserve in the long run.” Alan Greenspan, in the paperback edition of his memoir, due out next month,…" More here.
