Political Economy: Hatin' on the Fed

Andrew Jackson would assuredly be pleased at the rising congressional distrust of the Federal Reserve. The populist president, who won re-election in 1832 on a platform of abolishing the Second Bank of the United States, was an early hater of power concentrated in huge financial institutions.

His was a winning political formula, and so it is today for many lawmakers, economists, pundits, civic activists and ordinary citizens from both parties and from both ends of the political spectrum. To these Fed-haters, the U.S. central bank is the locus of all that is evil in the global financial system.

In their collective world view, the Fed caused the crisis that brought the economy to a crashing halt a year ago, and then it bailed out the financiers who profited from the housing bubble at our expense. (Timothy F. Geithner, who was at the helm of the New York Federal Reserve Bank at the height of the crisis before he was tapped for Treasury secretary, comes in for a double dose of opprobrium and bipartisan calls for his ouster.)

At the same time, all this chest beating must clearly be yet another sign that the economy is on the mend and that the financial crisis is abating. Hardly anyone is even trying to argue against moves by the House Financial Services Committee to strip the Fed of some of its political independence and by the Senate Banking Committee to eliminate the Fed's role in the supervision of large banks. New Hampshire GOP Sen. Judd Gregg delivered a broadside that the House panel is engaged in "political pandering," but otherwise it's open season on the central bank now that it has succeeded in limiting the carnage.

It's hardly surprising that there's so little complaint of overreaching by the populists. Few people really understand what the seven members of the Fed's Board of Governors actually do, or appreciate the role played by the 12 regional Fed banks in managing the nation's money supply and supervising the enormous companies that oil the engines of American capitalism.

Moreover, the central bank isn't exactly a cuddly or sympathetic creature. With a balance sheet that includes assets worth $2.21 trillion, the Fed is demonstrably in command of riches to rival Croesus, and it possesses a Midas-like capacity to print money to buy whatever it wants. That sort of hegemony is anathema to the American sense of what is right and good. The central bank's zealous demand of secrecy in its specific deliberations -- even as it has become far more open about its actions as well as its processes -- doesn't help its public relations problem. That secrecy is at the nut of all this anger.

Exposing the Central Bank To those with long memories, this current episode of Fed-bashing is hardly new. Two decades ago, William Greider's "Secrets of the Temple" sought to pull back the curtain and expose the Fed's power to disinfecting sunlight. The book, which provided many Americans with their first real exposure to the workings of the central bank, escalated the hand-wringing over the actions of Paul A. Volcker. As Fed chairman from August 1979 until August 1987, he had engineered a surge in interest rates that contributed to the deep, double-dip recessions of 1980 and 1981-82 and led to the last time the country's jobless rate spiked above 10 percent.

Of course, Volcker is now seen by many as a visionary whose actions wrung inflationary fears out of the economy for a generation, and whose sage advice isn't being followed closely enough by the Obama administration. No one remembers him as the enigmatic chairman who deflected lawmakers' questions and disguised the Fed's intentions behind a cloud of cigar smoke.

But it's a losing argument to say the Fed can do its job only in secret, although the central bank's defenders say a degree of confidentiality is also at the core of its mission.

Last week, House Financial Services Chairman Barney Frank of Massachusetts was unsuccessful when he tried to fend off a populist assault on the Fed led by Republican Ron Paul of Texas and Democrat Alan Grayson of Florida -- two lawmakers not known for having large numbers of followers in their party caucuses. Frank contended that opening the Fed's books and deliberations to public audit for the first time would jeopardize the conduct of monetary policy, and push interest rates higher because investors would conclude that inflation-fighting would be subverted by political interference. But his appeal fell short. While a majority of Democrats on the panel voted against the audit requirement, 15 members of Frank's caucus joined 28 Republicans in supporting it.

It's is a tough case to make, but lawmakers may do their constituents more harm than good in their quest for central bank disclosure. Rising unemployment, egregious corporate bonuses and still-tight credit markets won't be solved by opening up the Fed's records. By going after the Fed, lawmakers may actually make all those existing problems more difficult to fix.

The Democrats and President Obama have serious political and economic problems on their plates. They need to be careful not to make one worse in trying to solve another.

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