Thursday, October 15, 2009

Federal Reserve in Capitol Hill crosshairs

Business Times - 16 Oct 2009

Federal Reserve in Capitol Hill crosshairs

But it's hoping that signs of rebound would ease political momentum of 'audit the Fed'


IT'S not surprising perhaps that the US Federal Reserve system has traditionally been the target for bashing by America's populist movements on the political left and right. It has also become an obsession for many conspiracy theorists everywhere, who depict it as the central headquarters of a mighty yet shady cabal of financiers who control the global economy and promote the interests of the Ruling Class.

After all, the Fed - a set of 12 regional banks under the direction of a seven-member board of governors appointed by the president and approved by the Senate - is one of the most powerful public institutions in Washington if not in the world; its decisions could determine whether national economies, private business or your average consumer would be poor(er) or rich(er).

But at the same time, the US central bank is also one of the most secretive governmental organisations whose operations are shrouded in mystery and cloaked in technical jargon that only someone with a PhD in economics could fully comprehend (perhaps).

During times of economic prosperity, the Fed seems to draw very little attention beyond the community of investors and financial analysts who try to deconstruct the decisions of the Federal Open Market Committee (FOMC) whose 12 members - the board of governors plus five regional bank chiefs - is responsible for adjusting the federal funds interest rate.

Congress and the general public tend to refrain from bothering the esteemed and wise men and women who are perceived to be doing a great job - remember Alan Greenspan - making all of us rich(er).

But public and Congressional preoccupation with the Fed seems to rise during periods of economic recession as the sinister central bankers are being blamed for making all of us poor(er) while being accused of taking care of their buddies in Wall Street. That public negative perception of the Fed was widespread during the stagflation era of the 1980s when then Fed chairman Paul Volcker was raising interest rates to control inflation.

And that kind of anti-Fed sentiment has been gaining ground since the start of this Great Recession. The Fed's easy-money policies under Mr Greenspan have been blamed for inflating the housing bubble and the ensuing financial crisis while the central bank under Ben Bernanke has been accused of failing to foresee the approaching crisis and taking the necessary steps to prevent it.

There has also been much criticism on Capitol Hill as well as among economic pundits about the way the Fed has responded to the financial crisis, and in particular, its strategy of bailing out failing US banks and financial institutions by extending them more than US$700 billion of taxpayer money, and of providing Wall Street with trillions of dollars in loans.

Moreover, much of the current public and Congressional hostility towards the Fed reflects the growing perception that this agency of the US government has become very powerful very quickly and with very little public and Congressional scrutiny.

More specifically, lawmakers are alarmed at the power of the Federal Reserve to regulate America's biggest financial institutions, at a time when billions of dollars have gone to banking institutions, and they are asking whether or not that money has been adequately identified and tracked.

In short, many on Capitol Hill want to rip the veil of secrecy off the Fed and make its operations more transparent and open to full examination by Congress.

In that context, two unlikely political allies, Republican Congressman Ron Paul, the leading libertarian figure on Capitol Hill, and former presidential candidate, and independent Senator Bernie Sanders of Vermont, who is the only US lawmaker who is proud to describe himself as a socialist, have been promoting 'audit the Fed' legislation in Congress.

A Bill in the House of Representatives (HR1207) that, among other things, would lift existing restrictions on what government auditors are allowed to look into when examining the Fed's books, including its dealings with foreign banks and governments, its 'actions on monetary policy matters', and the operations of the FOMC which directly affect the US money supply, has been co-sponsored by close to 300 lawmakers - all the Republicans in the House as well as 105 Democrats.

'I think most of the taxpayers in this country would find it really quite amazing that they could receive financial support from the federal government at zero interest loans and not have to tell anybody who it was that received that,' Mr Sanders said, explaining his support for auditing the Fed during a recent interview on public radio.

'When you're talking about lending out US$2 trillion of taxpayers' money, I think the American people have a right to know who got that money, what the terms are, whether there were any conflicts of interest.'

While that sounds very democratic, critics of the legislation proposed by Mr Sanders and Mr Paul express their concern that a growing Congressional scrutiny of the central bank could diminish its current political independence and that monetary policy could end-up reflecting competing political pressures on Capitol Hill as opposed to responding to the needs of the American economy. And that would cut down the credibility of the Fed among investors and put upward pressure on interest rates.

Indeed, Mr Bernanke and other Fed officials and observers insist that their strategy to contain the financial melt-down by providing cheap credit to financial institutions prevented what could have turned out to be a financial calamity, and that their policy was based entirely on non-political considerations.

But unfortunately for the Fed, it would be impossible to demonstrate that the American and global economies would have crashed without the massive monetary intervention by the central bank.

Fed officials hope, however, that growing signs of economic recovery could help reduce the political momentum in support of 'audit the Fed' legislations on Capitol Hill.

The problem is that the recovery could be slow and feeble; and against the backdrop of mounting deficits and concerns over inflation, Republican lawmakers are probably going to continue making life difficult for Mr Bernanke and his colleagues.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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