A Growing Chorus on the Hill Questions the Fed's Decisions
Thursday, March 26, 2009
The Federal Reserve, which for the past year has drawn mostly praise from Congress for its aggressive response to the financial crisis, is increasingly on the hot seat.
In recent weeks, members of Congress have criticized the central bank -- publicly and vociferously -- for failing to stop the payment of bonuses at American International Group, for not disclosing the names of companies that benefit from its massive lending programs and for acting without lawmakers' explicit approval in deploying vast sums of taxpayer dollars.
While the attacks are loudest from junior members of Congress, even some senior legislators are expressing growing wariness over how much power the Fed has amassed in its bid to contain the financial crisis. That has put an institution whose leaders traditionally keep their distance from politics on the defensive.
This change in tone comes as the Obama administration seeks to create a powerful new authority to oversee the stability of the financial system. Sources familiar with the matter said the Obama administration has the Fed in mind for that role. But given recent events, there is growing wariness in Congress about giving such powers to the Fed.
The central bank has vastly expanded its role since the onset of the financial crisis, acting to bail out Bear Stearns and AIG and launching new lending programs to support everything from home mortgages to business loans. It has repeatedly used special emergency authorities that increasingly make some in Congress uncomfortable.
Just this week, Federal Reserve Chairman Ben S. Bernanke faced frequently hostile questioning from the House Financial Services Committee, including a demand from Rep. Michele Bachmann (R-Minn.) that he point to where in the Constitution the Fed gets its authority. After Rep. Donald Manzullo (R-Ill.) pressed Bernanke for a "yes" or "no" in response to a question about the AIG bailout, the mild-mannered chairman replied testily, arguing that it was a "poorly posed question."
"The kind of decisions that are being made unilaterally by the Fed are decisions that King Louis XIV would have been hesitant to make," said Rep. Alan Grayson (D-Fla.), a first-term congressman who assailed Fed Vice Chairman Donald L. Kohn at a January hearing for not disclosing the names of recipients of about $1.2 trillion in loans.
The Fed has a long history of keeping private the identities of banks and other institutions that it makes emergency loans to, for fear that naming them would prompt a run on the institutions and cause a deeper crisis. Still, video footage of Grayson laying into Kohn over the issue has recently made him a mini-sensation on YouTube.
"These are decisions that involve trillions of dollars," Grayson said, "and they're being made by a group that feels itself beholden to no one."
Indeed, although the Treasury Department had to seek congressional approval for its $700 billion financial rescue package, the Fed, as an independent agency, has been able to inject more than $1 trillion into the financial system without explicit permission from Congress. Moreover, the Treasury has launched programs in coordination with the Fed, stretching its $700 billion further and avoiding the need to seek approval from lawmakers.
Rep. Barney Frank (D-Mass.), who has spearheaded the effort to give the Fed formal authority over the largest banks, investment firms, insurance companies and other entities that pose a systemic risk by this spring, now intends to move on that action in summer.
His counterparts in the Senate, however, appear more reluctant.