Bernanke: Back to Clark Kent

By Christopher Swann
August 11, 2009

Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.

After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.

Yet Bernanke’s reversion to Clark Kent is premature given the dangers still posed by a fragile U.S. economy. The Fed’s more timorous approach in recent months seems due to an increasingly hostile political environment combined with an improving economic one.

But until the United States is well on the road to recovery Bernanke should try to hold on to his swashbuckling spirit.

The Fed has every reason to be politically intimidated. Relations between lawmakers and the Fed are close to an all-time low.

Much congressional ire has been focused on the Fed’s role in bank bailouts. There has been nervousness over its expanded balance sheet, which more than doubled during the crisis to around 14 percent of GDP.

For some Republican Senators such as Jim DeMint, the Fed’s purchase of U.S. Treasuries has been aiding and abetting “reckless” spending by Obama. DeMint is not alone in believing that credit easing is a covert means of devaluing the dollar. In the House an increasing number seem willing to listen to obsessively anti-Fed Congressman Ron Paul.

It is a bad time for the Fed to have so many enemies. As lawmakers mull an overhaul of financial regulation, the stakes are high.

Firstly, they could refuse to bestow responsibility for “systemic risk” supervision on the Federal Reserve — a role Ben Bernanke seems eager to secure. The central bank already looks likely to see its powers over consumer protection taken
away. (Both decisions may be good for America but they would be defeats for the Fed.)

More worrying still, support has been building to give the investigative arm of Congress the right to audit Fed policy. A Ron Paul-inspired bill to do just this recently attracted 276 co-sponsors in the House.

Allowing the Government Accountability Office to second-guess Fed monetary policy decisions would be more than just a territorial loss for the Fed; it would be bad for the nation too.

“Headlines declaring that the investigative arm of Congress had cast doubt on the latest rate hike, for example, would certainly undermine the perception of an independent Fed,” says Vincent Reinhart, a former Fed official and now a scholar at the American Enterprise Institute.

Lawmakers could also strip Fed regional bank presidents of a vote on monetary policy, leaving just the Congress-approved Fed governors in charge. This would be another erosion of Fed independence.

With these swords hanging overhead, the Fed can be expected to take the safest path. All care will be given to restore the image of prudent, gray-suited central bankers.

The Treasury purchase scheme — the most controversial of the credit easing policies — will most likely be allowed to expire, followed shortly afterward by the mortgage-backed security program.

It is disappointing that the Fed is willing to tolerate the gloomy economic outcome it has been forecasting. A final burst of credit easing would not be without risks, economic as well as political.

But it could help ensure that any economic recovery will be self-supporting. More creative action to support the commercial mortgage-backed security market would be especially welcome. Meanwhile, providing further details of the exit strategy would allay fears that the Fed is going too far.

Hard as it may be, the Fed should try to block out the noises coming from Congress. Even if it means taking more political heat, Bernanke should not be willing to accept an anemic recovery and high unemployment.


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