By Neil Irwin
Washington Post Staff Writer
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.
"Whether or not those vast powers will reside at the Fed remains an open question," Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said at a hearing last week, particularly given the Fed's "increasing number of responsibilities and the obvious mistakes the Fed made in the run-up to the current crisis."
This week, Dodd seemed open to giving that authority to some sort of council of financial regulators, rather than entrusting it entirely with the Fed. He has been particularly critical of what he views as the Fed's failure to protect consumers in the years before the crisis.
Sen. Richard C. Shelby (R-Ala.), ranking Republican member of the Banking Committee, is even more critical. "They are economists, basically," Shelby said this week. "It is troubling to me and others to give the Fed powers maybe by default. I see the Fed, as a bank regulator, big-time failing the American people."
A Fed spokeswoman declined to comment on the recent criticism from Capitol Hill.
Despite misgivings in the Senate, officials in the financial industry say the Fed will ultimately end up with the new role of systemic risk regulator.
"There are criticisms coming out on this proposal, but what you're not seeing is many other proposals," said Scott Talbott, senior vice president at the Financial Services Roundtable, an industry group. "Some say we'll create a separate entity, but that seems like a very heavy lift to create a whole new regulator out of nothing."
Meanwhile, discontent over the Fed could flare up on a more obscure issue: whether the central bank should have the authority to issue its own debt.
That power would give the Fed the flexibility to rein in the money supply in the future despite the massive expansion of its balance sheet because it would be able to suck money out of the financial system without selling assets.
The central bank released a set of principles on Monday indicating that it will pursue that power. Fed watchers aren't sure it will fly.
"Coming out of this, Congress is going to be much more circumspect about giving the Fed free rein," said Vincent Reinhart, a former senior Fed official who is now a scholar at the American Enterprise Institute.