The political central bank
I wrote this in April 2009 about the Federal Reserve’s machinations:
You should note that only the fiscal stimulus required legislative approval. All of the other ’stimulus’ has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government’s claims of wanting to increase transparency ring hollow (see my post on Bloomberg’s suit against the Fed as an example of what is really happening).
I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.
Now, as the Bernanke nomination has run into a bit of trouble, the Wall Street Journal is picking up on this theme:
The White House said yesterday it has damped down a political revolt against Ben Bernanke and now has the votes to secure the Federal Reserve Chairman’s second four-year term. Whether or not Mr. Bernanke is confirmed, the lesson we draw is that overly political central bankers will eventually be undone by politics…
Our own view is that Mr. Bernanke is already far too susceptible to political pressure. As a Fed governor, he was Alan Greenspan’s intellectual co-pilot last decade when their easy money policies created the housing mania. When Congress later put political pressure on the Fed to direct credit toward housing, and even to student loans, Mr. Bernanke (who was then chairman) also quickly obliged.
More ominously for the next four years, Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. Shortly after the New Year, even with his nomination pending, Mr. Bernanke issued an apologia that was striking for its willingness to play to the Congressional theory of the meltdown by blaming bankers and lax regulators.
And we should not forget his interview with “60 Minutes” during the period leading up to his re-nomination. That was clearly a PR move. For the time being, traders think Bernanke is safe. His intrade odds of confirmation have gone up from 80 to 95%.
But the Fed has been hugely politicized and this is going to be a problem for some time to come. With the Fed still acting as a quasi-fiscal agent through its backdoor recapitalization of the banks, you can bet calls for more oversight will continue.
Sources
The Bernanke Nomination: The politicians turn on a political central banker – WSJ.com
Central banks and financial crises – Willem Buiter, KC Fed
About Edward Harrison
- What’s a central bank to do? 3 Jun 2008
- Andy Xie: Central bank “arsonists have been asked to put out the fire” 28 Oct 2009
- U.K. central bank does not follow Fed to ZIRP 17 Dec 2008
- Markets, Bernanke and the political calculus of re-nomination 24 Jan 2010
- Bernanke doesn’t understand the basic economics of central banking 19 Dec 2009