Fed under fire as public anger mounts  

Submitted by cpowell on 07:28AM ET Sunday, November 22, 2009. Section: Daily
Dispatches
By Tom Raum
Associated Press
via Yahoo News
Sunday, November 22, 2009

http://news.yahoo.com/s/ap/20091122/ap_on_an/us_punching_bag_fed_analysi…

WASHINGTON — Suddenly the Federal Reserve is everybody’s punching bag.

Strip the Fed of its bank regulation powers, some in Congress are demanding. Get
probing audits of its behind-the-scenes operations, others say.

The chairman of the Federal Reserve Board is always fair game for criticism and
second-guessing, usually over interest rate actions. But this year the criticism is
much broader as Congress responds to widespread public anger that the Fed bailed out
Wall Street but not ordinary Americans, and with unemployment in double digits.

Former Fed chairman William McChesney Martin Jr. famously said that the central
bank’s job was to yank away the punchbowl just when everybody is starting to party.
And while Fed Chairman Ben Bernanke has signalled the Fed will keep interest rates
low for now, a round of higher rates inevitably will come.

The Fed finds itself both the punchbowl keeper and the punching bag. Imagine the
outcry when it does begin to crank up rates â?? perhaps just ahead of next year’s
midterm elections.

Fireworks seem likely at Senate confirmation hearings early next month on President
Barack Obama’s nomination of Bernanke to a second four-year term as chairman.

Many economists and Fed watchers say congressional efforts to rein in the Fed’s
powers could interfere with the central bank’s ability to help guide the fragile
economy to recovery.

The Fed’s very independence and its unique ability among U.S. institutions to create
money out of thin air enabled it to act quickly to stabilize the nation’s financial
system after it froze up last September after the bankruptcy of the Lehman Brothers
investment house, Fed backers say.

“It might have been the Fed’s finest moment when it had to jump into the market,”
said David M. Jones, a former Fed economist and president of DMJ Advisors, a
Denver-based consulting firm. “We still have to wait to see how effective the Fed is
in its exit strategy and whether it can keep inflation in check. But this badgering
by Congress, even if there is populist sentiment, is inappropriate.”

The Fed’s aggressive intervention also set the stage for the current criticism. Many
lawmakers question whether the Fed’s money machine has mainly benefited financial
markets and not the broader economy. Lamakers are also peeved that the central bank
acted without congressional involvement when it brokered the 2008 sale of failed
investment bank Bear Stearns and engineered the rescue of insurer American
International Group.

Bernanke, first appointed by President George W. Bush, has worked closely with both
Treasury Secretary Timothy Geithner and Bush Treasury Secretary Henry Paulson in
confronting the worst financial crisis in decades. Geithner also has gotten his
share of congressional wrath, mainly for his administering of the $700 billion bank
bailout fund.

“In the past, the Federal Reserve was held in very high esteem,” said Rep. Ron Paul,
R-Texas, a libertarian who ran a quixotic third-party presidential campaign in 2008.
Now, it’s “the source of our problem,” suggests Paul, author of the bestseller “End
the Fed.”

Usually an outlier, Paul suddenly has found an army of at least 307 House colleagues
and 30 senators marching behind his legislation to subject the Fed to intense
scrutiny by Congress’ Government Accountability Office. The House Financial Services
Committee endorsed Paul’s approach 43-26 last week over objections from its
chairman, Rep. Barney Frank, D-Mass.

The bill would authorize Congress to audit not only the Fed’s lending programs but
its basic decisions to set monetary policy by raising or lowering interest rates.
Paul has been introducing a version every year since the early 1980s, but this is
the first time it has garnered any serious attention.

Senate Banking Committee Chairman Chris Dodd, D-Conn., who will preside over
Bernanke’s confirmation hearings, has proposed legislation that would strip the Fed
of its bank-regulation authority and give the Senate a role in selecting the 12
regional Federal Reserve bank presidents.

Dodd says his measure would return the Fed to its core mission of setting monetary
policy, claiming it proved itself “an abysmal failure” by not cracking down on risky
lending practices that led to the financial meltdown.

Dodd is in an extremely tight battle for re-election, even though he has served in
Congress for 35 years.

“I don’t think it ever hurts to have a member of Congress stand up and denounce the
Fed. There is a lot of anger out there, and this is basically a therapeutic
gesture,” said Ross Baker, a political scientist at Rutgers University. 

Still, Baker said, it probably isn’t wise to tamper with the formula that makes the
Fed “very much an anomaly in American government. It’s independent, it has to be.
You don’t want the Fed to be under the control of the president. And it kind of sits
out there — not in the executive branch, not in the legislative branch, not in the
judicial branch. Sort of its own little element in the separation-of-powers
constellation.” 

While the Fed is subject to some congressional oversight, its decisions don’t have
to be ratified by the president or Congress. Fed officials are not paid with money
appropriated by Congress. 

Should Bernanke be worried? 

“Not only should be worried, he’s clearly ratcheted up his game in terms of his
communications with Congress,” said Norman Ornstein, a senior fellow at the American
Enterprise Institute. 

Ornstein said the Fed bashing this time is different from before, with “a broader
base of support. And it’s coming from people who in the past would not have hit the
Fed. There’s a lot of populist anger out there — on the left, in the center, and on
the right. And politicians are responsive to that.”

* * * 

Join GATA here: 

Vancouver Resource Investment Conference
Sunday and Monday, January 17 and 18, 2010
Hyatt and Fairmont Conference Hotels
Vancouver, British Columbia, Canada
http://www.cambridgeconferences.com/index.php/vancouver-resource-investm…

* * * 

Support GATA by purchasing a colorful GATA T-shirt: 

http://gata.org/tshirts 

Or a colorful poster of GATA’s full-page ad in The Wall Street Journal on January
31, 2009: 

http://www.cartserver.com/sc/cart.cgi 

Or a video disc of GATA’s 2005 Gold Rush 21 conference in the Yukon: 

http://www.goldrush21.com/ 

* * * 

Help keep GATA going 

GATA is a civil rights and educational organization based in the United States and
tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and
you can subscribe at: 

http://www.gata.org 

To contribute to GATA, please visit:

http://www.gata.org/node/16
Contact GATA
info@gata.org

Gold Anti-Trust Action Committee
7 Villa Louisa Road
Manchester, Connecticut
06043-7541 USA

www.gata.org