Jason Reed/Reuters
But the Fed’s decision to bail out financial firms after the collapse of Lehman Bros. in the fall of 2008 soured many who had previously held the Fed in awe. “No previous Fed ever came close to buying a trillion dollars of mortgages. No central bank in any civilized country does that,” says Meltzer. “The Fed has used its ability to print money to perform a lot of tasks that should be performed by the administration and Congress. That is a breach of its independence.”
Paul quickly found a wider audience for his assault on the central bank. His 2009 book End the Fed debuted at sixth on the New York Times bestseller list. That year, he introduced another bill to rein in the Fed—more modestly, it would remove all restrictions on congressional audits—and it found 319 co-sponsors from both parties. When the House passed a financial reform bill in December, on a largely party line vote, Paul’s audit language was part of it. The Fed would be left with depleted powers and, for the first time, Congress would be able to open its most closely guarded ledgers.
The central bank has responded with an unprecedented campaign to restore its public standing. It placated consumer advocates by speaking out on subprime lending and taking action on unsavoury credit-card practices. When Bernanke’s second term looked in doubt, he grovelled before senators for their votes. He was ultimately re-confirmed, albeit by a 70-30 vote that was the closest in history (having lost the support of some prominent former admirers, like McCain). Since beginning a new term, Bernanke and his staff now regularly tell Congress what they would like to see in a final bill—an unusually forward approach to lobbying from an institution that once proudly stayed far from politics, but has been forced to behave like any other federal bureaucracy desperately protecting its turf.
Already, the Fed seems to be doing better in the Senate than it did in the House. A centrepiece of Obama’s proposal is a new authority to protect ordinary borrowers from predatory financial practices, modelled on the Consumer Product Safety Commission that monitors everything from toys to toothpaste. While the House bill proposed a stand-alone Financial Products Safety Commission, the Senate’s version turned it into an autonomous body within the Federal Reserve. “Their political rehabilitation has been remarkable,” says Holtz-Eakin.
In addition, the Democrats’ Senate bill would give the Fed new powers to regulate—and potentially disband—large financial holding companies, the type of firms that legislators fear could again become “too big to fail” and require further bailouts. (At the same time, the Fed would lose supervision of small banks.) The House provisions to audit the Fed found less support among senators; New Hampshire Republican Judd Gregg called it a “dangerous move by this Congress to pander to the populist anger currently directed against our central bank, the Federal Reserve.”
The Senate is expected to finish with financial reform over the next few weeks after working through these and other issues, including derivatives reform. Whatever legislation passes will then have to be merged with the House bill—and the differences in how they treat the Fed are likely to dominate negotiations between the two chambers.
Holtz-Eakin, a former director of the Congressional Budget Office, expects that members of Congress will eventually conclude that a robust, independent Fed—no matter how irksome they find it now—can offer them plausible deniability in the future. “Independence only comes into question in crises,” says Holtz-Eakin. “It is convenient to have the independent Fed when things go wrong and they can blame them again.”
Pages: 1 2
