Bernanke confirmation hearing likely to be contentious
Federal Reserve Chairman Ben S. Bernanke may be heavily favored to win Senate confirmation for a second term, but he faces a far tougher challenge in trying to beat back efforts by angry lawmakers to curb the Fed’s independence as an arbiter of economic policy.
The anger, which is likely to boil up today at Bernanke’s confirmation hearing, arises from the Fed’s widely acknowledged failure to curb the excessive risk-taking and other financial behavior that helped precipitate the worst economic crisis since the Great Depression.
Reflecting the antagonism Bernanke faces in Congress, Sen. Bernie Sanders of Vermont placed a hold on the Fed chief’s nomination late Wednesday.
The move by Sanders, an independent who caucuses with the Senate’s Democrats, isn’t expected to derail Bernanke’s confirmation.
Posing more of a threat is an increasingly powerful effort to subject the Fed to congressional audits and other supervision. That campaign has raised concern among economists and some policymakers that global confidence could be shaken if foreign investors fear the U.S. central bank will be subject to the shifting winds of domestic politics.
Over the last two decades, politicians around the globe have tended to take a more hands-off approach toward central banks as evidence has mounted that doing so produces lower levels of inflation.
“All the evidence points to the fact that decreasing independence and meddling in monetary policy by politicians are likely to create inflation,” said Alex Cukierman, an economics professor at Tel Aviv University who has done extensive research on central banks. “Politicians are, after all, advocates. There is a bias to expand the economy.”
Now is a particularly bad time to take steps that raise questions about the credibility of the Fed as a bulwark against inflation, said Ethan Harris, a former research officer at the Federal Reserve Bank of New York and author of “Ben Bernanke’s Fed.”
“We’re already in a situation where we’re dependent on the kindness of strangers,” Harris said, referring to the large debts owed by the United States to China and other foreign governments. “It’s not a way to inspire foreign investor confidence.”
China and other countries hold billions of dollars in Treasury bills, primarily because those countries have considered the U.S. government securities more stable and secure than other forms of investment. In recent months, however, Chinese and European officials have raised the prospect of shifting to other investments -- a move that could raise the U.S. government’s already hefty interest costs.
Economists in China have been keenly following the debate over the Fed’s autonomy, said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, Research Center for International Reform.
“Their policy will have a huge impact on China’s holdings,” he said.
Bernanke has waged an unprecedented public campaign for a second term, including a rare television interview, a town-hall-style forum and opinion articles in newspapers. Privately, he has pressed his case in individual meetings with dozens of members of Congress.
But such efforts have been offset by continuing double-digit unemployment and public outcries over government bailouts of major banks and other entities deemed “too big to fail,” as well as resentment over multimillion-dollar bonuses being paid to top executives of foundering companies that took federal bailout money.
On Wednesday a House committee passed a regulatory overhaul bill that would broaden congressional oversight of the Fed, including scrutinizing the institution’s monetary policy decisions on setting interest rates.
A similar measure, with 30 bipartisan cosponsors, awaits action in the Senate.
What’s more, under a proposal by Sen. Christopher Dodd (D-Conn.), not only would the Fed be stripped of much of its regulatory powers, but also the appointment of regional Fed bank heads, long an internal matter, would require Senate confirmation.
Dodd, chairman of the Senate Banking Committee, has called the Fed an “abysmal failure” as a regulator, although he has spoken more favorably of Bernanke’s performance. Along with a majority of the committee’s members, Dodd appears likely to support a second four-year term as chairman.
Although known primarily for managing the nation’s money supply by raising or lowering interest rates, the Fed has broad authority to make loans and supervise banking institutions. The central bank also holds emergency powers, which weren’t exercised until the recent financial crisis, to bail out firms whose failure could threaten the larger financial system.
In 1978, Congress passed legislation allowing the Government Accountability Office, an investigative arm of Congress, to audit the Fed’s operations. But the measure specifically barred oversight of monetary policy proceedings and a number of other transactions.
The Fed’s independence is further enhanced by the 14-year terms for members of the board of governors, who are appointed by the president and confirmed by the Senate. (The Fed’s chairman and vice chairman have four-year terms.)
None of this means the Fed has been immune from political pressure. Its dual and sometimes conflicting mandate of controlling inflation and maximizing employment has put the central bank in the cross hairs of politicians with shorter-term considerations, particularly during election cycles and at turning points in the economy.
Lyle Gramley, a former Fed governor, remembers how the Fed’s head of research during the Nixon administration was called into the office of H.R. Haldeman, Nixon’s chief of staff, and told: “Don’t you ever leave the office without thinking, ‘What have I done to increase’ the money supply?”
Gramley served as governor in the first half of the 1980s, a pivotal period for the Fed under Chairman Paul A. Volcker, whose efforts to break high inflation by sharply boosting interest rates engendered strong political attacks and protests on the streets of Washington and elsewhere.
Gramley believes the public animus toward the Fed is greater today than it was then -- and he worries where it will lead.
Suppose the Fed starts raising rates late next year when unemployment is running at 9.5%, he said.
“The GAO does an audit, questions seriously why, and it provokes congressional outrage and a congressional resolution to keep rates down,” Gramley said. “I can see the possibility of significant interference by Congress.”
Even if there is no actual interference, many analysts say, congressional oversight of monetary policy will be seen in the markets as a step toward eroding the independence of the Fed.
“Once this starts, it’s not going to stop. The next suggestion will be, ‘Let’s put the [Fed’s policymaking] meeting on TV,’ ” said Anil Kashyap, a professor at the University of Chicago’s Booth School of Business.
Proponents of reining in the Fed argue that scenarios of interference are overblown because Bernanke and his colleagues will retain the authority to make decisions on their own.
In the Senate, Sanders of Vermont said the Federal Reserve Sunshine Act, which he introduced, would merely have the GAO undertake a full audit of the Fed to see what additional actions should be taken.
In the House, legislation proposed by Rep. Ron Paul (R-Texas) to audit the Fed was co-sponsored by more than 300 members before it was added as an amendment to a regulatory overhaul bill.
“It is very hard for me, for anybody, to suggest that the Fed has done a good job and that we don’t need real change at the institution,” Sanders said in an interview.
“The middle class is collapsing. We have 17% unemployment and underemployment. Bernanke was chairman of the Fed when we moved toward the greatest recession since the Great Depression without his alerting the public.”
Times staff writer David Pierson in Beijing contributed to this report.