With unemployment in double digits and elections less than a year away, the search for an economic boogeyman is in high gear on Capitol Hill.
Meet Ben Bernanke, chairman of the Federal Reserve.
President Obama’s nomination of Bernanke for a second term, together with financial regulatory reform proposals from both the administration and Congress, have given lawmakers a chance to blame the Fed for current conditions and to try to strip it of its independence.
Just a couple of minor details get in the way. The two biggest factors that led to the Great Recession and last year’s financial meltdown were reckless mortgage lending (especially subprime lending) by government-sponsored Fannie Mae and Freddie Mac, and the even more reckless issuance of financial instruments by AIG, the insurance holding company that did not have nearly enough resources to back the promises it was making.
Fed officials, led by Bernanke’s predecessor Alan Greenspan, warned Congress years ago about the risks Fannie and Freddie posed to the financial system. They had no power to stop AIG from doing what it was doing, because AIG was not a bank and the Fed lacked authority over non-bank financial institutions.
This is not the story that members of Congress want voters to hear. Rather than acknowledge that the Fed under Bernanke acted decisively, if imperfectly, to prevent the financial panic from triggering a global economic collapse, they prefer to blame the Fed for not having prevented the crisis in the first place. Never mind that the Fed actually did warn Congress of the growing subprime threat, and that it was Congress — specifically, Senate Democrats — who blocked action back in 2005 and 2006.
Now, Senate Banking Committee Chairman Christopher Dodd, D-Conn., has proposed legislation that would strip away much of the Fed’s power, including its authority to oversee consumer protection and bank regulation. Dodd, who faces a tough re-election fight next year, argues that the Fed’s failure to prevent the financial crisis requires Congress to rein in its powers.
“We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure," Dodd said.
In the House of Representatives, more than 300 members have signed on to co-sponsor legislation by Rep. Ron Paul, R-Texas, to have the auditing arm of Congress oversee the Fed’s operations. Yes, this is the same Congress that cannot work up the intestinal fortitude to bring the government’s short- and long-term spending into any sane relationship with its revenues. Having turned fiscal policy into a train wreck, Congress now wants to vote itself a big say-so in the Fed’s realm of monetary policy.
Heaven help us if it succeeds
Bernanke, to his credit, has not taken this lying down. In an opinion piece in The Washington Post, Bernanke countered the criticisms of his agency. “The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution's ability to foster financial stability and to promote economic recovery without inflation,” he wrote.
Bernanke also made his case directly in front of Dodd's committee as it considered his renomination. “The Federal Reserve's actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies,” he told the unimpressed lawmakers.
While critics in Congress seek to put the Fed on a shorter leash, the Obama administration wants to expand Fed powers so institutions that could pose a threat to the system, such as AIG, are less likely to fall through the regulatory cracks. As I wrote back in August, a single, centralized agency has an advantage over several separate agencies because it can analyze related trends across different domains.
The president may belong to the same party as the Democrats who control Congress, but they have different near-term concerns. Legislators are worried about keeping their control, and in some cases their jobs, after next November. The president does not face the voters again until 2012, and he needs competent hands to nurse the economy back to health by then.
If Congress wants a boogeyman to blame for the financial crisis, it should stop staring at the Fed and take a look in the mirror. Through its failure to heed the warnings of Fannie and Freddie’s excesses, Congress did much more than the Fed to create the current mess, and it has done much less to clean it up.
Voters should watch carefully to see whether the current occupants of the Capitol are bright enough to recognize this. If they are not, next November will be a good time for more of that “change” we heard so much about last time we went to the polls.