Time for the Fed to stand up to its critics

August 20, 2009

John M. Berry is a guest columnist who has covered the economy for four decades for the Washington Post and other publications.

By John M. Berry

Financial crises and the policies to deal with them top the agenda at the Kansas City Fed’s Jackson Hole conference. But what is actually going to be on everyone’s mind at the august gathering is the uncertain future of the Federal Reserve itself.

Many members of Congress want to clip the Fed’s wings for failing to prevent the crisis and for its actions since the meltdown began two years ago. In particular, most are angry about government bailouts, starting with the $29 billion in Fed backing for the purchase of Bear Stearns by JPMorgan Chase.

Financial institutions got into trouble because they took enormous risks, and the public bailouts look suspiciously like unjustified rewards for fat cats’ wildly reckless behavior. But the bailouts were an unavoidable cost of halting the country’s plunge into a second Great Depression. Congress has got to swallow its anger and do what is needed for the future.

The first objective on the financial reform agenda when Congress reconvenes next month should be to do no harm. That means killing legislation that would direct the Government Accountability Office to “audit” the Fed’s monetary policy actions. Such audits could allow politicians to influence those decisions, which is exactly what some of the bill’s sponsors want.

Angry as they may be at the central bank right now, members of Congress would surely rue the day they had to deal directly with raising interest rates — a step that will inevitably be needed at some point to curb inflation and keep the economy on an even keel.

Whatever else the role of the Fed is to be, its monetary policy independence should be preserved as it pursues its twin mandates of stable prices and maximum sustainable employment. And Fed officials need to be insulated from political pressures.

In return for that insulation, the Fed has become ever more open and accountable. Since 1994, the central bank has started announcing policy changes as soon as they are made, quickly publishing detailed minutes of policymaking meetings, and releasing transcripts after a five-year lag. It also now makes public details of the long-term forecasts of its top officials.

The second Fed role that must be preserved in the national interest is that of lender of last resort to financial institutions. Solvent banks that get squeezed for cash must be able to borrow directly from the central bank to prevent a failure that could trigger a collapse of other institutions.

Of course, the Fed, led by Ben Bernanke, went far beyond that traditional lending role last year. Citing legal authority not used since the 1930s, it loaned money not just to banks but to brokers, investment banks and insurance companies. And when that failed to stabilize money markets, it risked hundreds of billions of dollars of taxpayer money to buy mortgage-backed securities and other private credit instruments to make credit more available to businesses and households.

Bernanke and other Fed officials were uncomfortable extending credit in these unusual ways, which really ought to have been the Treasury’s responsibility. But, objectionable as they were to many members of Congress and to a number of economists, these measures have proved essential. In any case, the Treasury Department did not have the money or the authority to act. To settle this for the future, Treasury should be granted both under the financial system overhaul.

There is also plenty of opposition to the administration’s proposal to give the Fed broad oversight of financial markets as a regulator of systemic risk. The crisis has demonstrated that such a regulator is badly needed, and the Fed should win this one by default. Despite the central bank’s failure to head off the crisis, there is simply no other agency — not the Securities and Exchange Commission, the Federal Deposit Insurance Corp, the Comptroller of the Currency or any other — capable of doing the job.

As for the remaining key issue, consumer protection, Bernanke should cede responsibility for truth-in-lending and all related activities to the new consumer agency proposed by the administration. If he does that, the Fed will be more likely to keep the powers it really needs.

25 comments

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“Nothing in this proposal would call on Congress to involve itself further in monetary policy, as that is completely unnecessary…Also, Congress already dictates monetary policy to the Federal Reserve through the mandates of full employment and stable prices.” – Ron Paul

Killing legislation to audit the FED should NOT be a priority of Congress! Gaining more support for the bill shoud be. The statement by the author of this article is unfounded and I would like to question his reasoning on this one: “Such audits could allow politicians to influence those decisions, which is exactly what some of the bill’s sponsors want.”

If I have to be subject to a full audit, then why shouldn’t the Federal Reserve bank which handles trillions?

Posted by jMunny | Report as abusive

“its twin mandates of stable prices and maximum sustainable employment.”

Epic Fail

Posted by dvictr | Report as abusive

I would like to know why the Fed injected cash into AIG; which was then used to immediately pay AIG’s counter-parties 100% on the dollar. You aren’t curious why Goldman Sachs got $13 billion?

Regarding transparency: The Fed refused to disclose the the payouts to Goldman Sachs and other investment banks. It wasn’t until Congress leaned on AIG that we learned about the incredible wealth transfer from taxpayers to Wall Street.

Do you defend the Fed’s handling of the AIG “bail out”? Was the Fed right to not tell taxpayers than it gave $13 billion to Goldman Sachs; and billions more to several other banks?

Wasn’t the AIG “bail out” just a way to recapitalize banks? Many (most?) taxpayers would not have supposed bank recapitalization. Why should the Fed be able to use taxpayer money in a way that nearly every taxpayer would oppose?

Well, what was done is done. Now it is time to get on with things and get the money back plus substantial interest and penalties from the whole banking system. Maybe we should also get enough to give the 401K losers their original stake. We need to avoid having this debacle wending its way through the court systems for the next 15 years. There are enough other problems to deal with rather than keep focusing on things that were done incorrectly. Just fix the mistakes.

Posted by f belz | Report as abusive

Get the money back? ARe you still holding out hope that we will somehow make money off of this transfer of wealth to the rich? Don’t forget, we are paying, and will be paying for the next 50 years, interest on the debt that was needed to do these bail outs. This bailout will never make money, it’s impossible.

The Gov’t cant run a $3 billion car program, but you think they can run a $2 trillion bailout and $2 trillion healthcare? This all was a sham, and I lost all respect for Mr. Berry if he is supporting the Fed and the terrible job Bernake and the rest of our gov’t has done, which will destroy our country for decades to come.

Posted by Steveo | Report as abusive

I support auditing the federal reserve so we can shed more light on exactly which institutions (goldman, JPMorgan, AIG, Berkshire) committed the greatest theft of money in the countries history and got away with it. I would like to learn exactly how this is done so I can do this one day.

Posted by Tom | Report as abusive

reuters seems to be coming up with a lot of pro green shoot, pro fed, type blogs and these are put up in bold+large fonts:-) should we get suspicious?

Posted by d&b | Report as abusive

John M. Berry,
How any normal person, let alone a supposedly “freedom loving” American, a Son of Liberty, with access to the internet; such as yourself, is opposed to Central Bank transparency is appalling! Did you do ANY historical research on central banks in this country and in others? You have made a FOOL of yourself for all posterity.
The child of honesty and transparency is TRUTH, something that is vital for a free society to remain so. As a matter of fact I sincerely hope that the FED’s fiscal policies ARE influenced by the audits!

I recommend you watch these videos; educate yourself! Afterword, if you have the courage, email me back and tell me why I am wrong.

Money as Debt
http://video.google.com/videoplay?docid= 5352106773770802849&hl=en

Money Masters
http://video.google.com/videosearch?q=mo ney+masters&hl=en&emb=0#

Posted by NB Patton | Report as abusive

We should end the tyranny the Fed has imposed on this country since it inception by the Super-rich in 1913. End the Fed now, start printing our own money like President Lincoln did to save the country from the Central Bankers of Europe in the greatest crisis the Republic every faced.
President Kennedy wanted to end the Fed, look what that got him. The Evil men who run this agency should be brought into the light of day and punished for their crimes against the people of this country.

Posted by Gary Bevis | Report as abusive

A public relations propaganda piece by the fed courtesy of this “guest columnist”.

“it risked hundreds of billions of dollars of taxpayer money to buy mortgage-backed securities and other private credit instruments”

Show me any proof that these were taxpayer dollars. They were federal reserve “notes” created by the fed which have no worth, meaning or legality in the Constitution.

Posted by John Upson | Report as abusive

Hogwash! Abolish the fed and return America to a Gold Standard!

Posted by jason | Report as abusive

Since the Fed is not part of the US Government subject to “check and balances” nor is it responsible to the citizens of the US (they are not elected) why shouldn’t it be audited? Even Ronald Reagan exhorted us to “trust but verify”.

Seems possible the 4 decades of covering the economy is starting to take its tole on Mr. Berry’s sensibilities and his keenness of perception of reality.
My gosh, to where has common sense and wisdom vanished?

Posted by Kent Kistler | Report as abusive

Dear Sir,
The statement: “…it risked hundreds of billions of dollars of taxpayer money to buy mortgage-backed securities and other private credit instruments to make credit more available to businesses and households.”, cannot be supported with facts. In Fact, BoA and other banks indeed reported that they made less money available to businesses and households during this period (fewer loans), NOT MORE.

Posted by edgy | Report as abusive

Seems funny that your anti spam word is TOAST. It would seem better to leave this word to describe the state of the American economy.

Posted by gd | Report as abusive

who pays for these jokers?

200 Econ PhD and access to every inside information in the world, yet they miss a

$56T bubble and cause $14T wealth destruction. what do you do for an encore?

Posted by bnankeisafraud | Report as abusive

It’s time criminal enterprise is rooted out of government. Auditing the Fed is the first step. The second is to require the Goldman Sachs gang and the JP Morgan family to wear masks when robbing us.

Posted by Sanford | Report as abusive

It’s funny how every poster here, and almost anybody with a financial interest and internet access, knows more the Mr Berry about the FED. They’ve done such a stellar job at those ‘stable prices and maximum sustainable employment’ objectives. So of course the FED should be granted ‘broad oversight of financial markets as a regulator of systemic risk’ ‘by default’.

Give me a break. How much did Mr. Berry get paid by Goldman Sachs to write this fine piece of financial insight. At this point anyone opposing the FED audit should be looked at suspiciously.

[...] John Berry: Time for the Fed to stand up to its critics [...]

[...] John Berry: Time for the Fed to stand up to its critics [...]

Who is John M. Berry? I have never heard of you. Methinks you are a government agent. Mr. Berry, are you enjoying the check you received to write this article?

Posted by Methinks | Report as abusive

I have not read such a poorly researched, lopsided report in many years. Or is it that, some ghostwriters will sell their souls for pennies.
I thought better of reuters. Shame

Do no harm by NOT auditing the fed? Accountability for the corporation that controls our currency system is harmful?
Let me have all your income, I won’t tell you what I do with it, but trust me, I’ll spent it wisely, really!

Let me print your money, I won’t print extra, really!

Let me make loans with your money on terms that I won’t disclose. It’s in your best interest, really.

This swampland is a great deal really!

Posted by rick galbreath | Report as abusive

Out of the mainstream media I would have expected nothing less, but an article this biased and unobjective coming from Reuters??? If I was Reuters, this would be the last article this “guest columnist” will write.

Posted by True Patriot | Report as abusive

Shame on Reuters for this propaganda piece written by the Fed and handed to Mr Berry along with a wad of freshly printed cash. This article is trash and shouldn’t even be hosted on a “I Heart Goldman Sachs” blog much less Reuters. Boo, hiss, boo!

Posted by Kyle | Report as abusive

Awsome article and straight to the point. I am not sure if this is in fact the best place to ask but do you guys have any ideea where to employ some professional writers? Thanks in advance

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