By David Ignatius
Sunday, November 15, 2009
Among the cherished prerogatives of members of Congress is the right to second-guess. That ritual is playing itself out with a vengeance as the solons of Capitol Hill attack the Federal Reserve for its role in last year's financial crisis.
The Fed made its share of mistakes in creating the bubble economy. But once the crisis hit, it was the Fed's innovative, try-anything response that saved the country from what might have been another Great Depression. Fed Chairman Ben Bernanke deserves a public "attaboy" for finding ways to pump liquidity into credit markets that were on the verge of freezing up tight. Instead, he's getting a congressional raspberry.
Bernanke's creative policies in 2008 were possible because of the Fed's political independence and its wide-ranging authority. Those broad powers are now under attack: Congress is proposing new limits on the Fed's role as financial supervisor and "lender of last resort" that could prevent it from responding as aggressively to the next crisis as it did to the last one.
The political challenge to the central bank's authority comes at an especially delicate moment -- as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But as the New York Times noted in a front-page article last week, the Fed is "under more intense attack than at any time in decades," from both left and right.
Wall Street so far appears unfazed by the criticism of the Fed, perhaps because investors assume that the protests are just political posturing. But this could change. "If Congress even appears to be politicizing the Fed's monetary policy function, rest assured that two market developments are inevitable -- a collapsing dollar and higher long-term interest rates," warns David Smick, a Washington financial consultant.
Fed-bashers have an unlikely new champion in Sen. Chris Dodd, who introduced a bill last week that would strip the central bank of most of its supervisory functions. The Connecticut Democrat said that the Fed had been "an abysmal failure" as a regulator and that its powers should be given to a new supervisory agency that, presumably, would be subject to greater congressional oversight.
How did Dodd, the gentlemanly chairman of the Banking Committee, suddenly become a neopopulist after five terms in the Senate? The answer is that in the era of anti-government indignation, Fed-bashing seems to be good politics. Dodd faces reelection next year, and he's already being attacked for supporting policies that contributed to financial bailouts.
For a sampling of the overheated attacks on the incumbent, you can visit a Web site called "The Dodd Crisis," organized by Rob Simmons, a former member of Congress and one of his potential challengers. It catalogues Dodd's support for the managements of Fannie Mae and Freddie Mac and his role in authorizing bonuses for AIG executives. It notes that Dodd was a leading recipient of campaign contributions from all three bailout recipients.
Dodd's newfound skepticism about the Fed is symptomatic of the central bank's larger problem. With unemployment above 10 percent, the public is angry about last year's financial crunch -- and looking for people to blame. The Fed is just elitist enough, and Bernanke is just enough of a professorial egghead, to make them targets for popular anger.
Bernanke's supporters offer a simple argument for maintaining the Fed's current role in supervising banks. Without it, they say, the Fed would lack the information -- and the "feel" for the markets -- to intervene effectively in a crisis. Countries that tried to separate central banks from financial regulation, such as Britain, are now regretting it, the Bernanke camp argues. To act effectively as lender of last resort, the Fed's proponents say, it must know its customers -- which will be much harder if it's stripped of its current regulatory role.
Today's critics of the Fed weren't so vocal a year ago, when the economy was in free-fall. When Bernanke briefed key members of Congress about his plan to save AIG from a catastrophic meltdown, Senate Democratic leader Harry Reid is said to have offered this waffling response: "I want you to understand that we are not giving you permission, and we're not saying no. We reserve the right to comment later."
Perhaps it's a harbinger of good times that Congress now wants to reassert its authority. But it would be stupid, even by congressional standards, to enfeeble the Fed -- one of the few institutions that actually rose to the challenge in last year's crisis.