United Liberty

In an editorial at the Washington Post, Federal Reserve Chairman Ben Bernanke defends actions taken during and after the economic downturn and argues against legislation working through Congress, such as HR 1207:

For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Bernanke also notes that the Fed has taken steps that, in his mind, have helped the economy during the recession, such as keeping interest rates low and continuing its easy money policy.

These are political moves which are no different from what got us into our current situation. Bernanke knows that, however, he knows the high interest rates that really are necessary during a time like this will not be popular with the public.

Bernanke also continues to tell tales about an audit of the Fed. He says, “Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.”

As I explained in July, Bernanke is purposely misleading here. Everyone, including the bill’s sponsor, Dr. Ron Paul (R-TX), understands that Congress should not get involved in monetary policy. What HR 1207, currently co-sponsored by 313 members of the House of Representatives, would do is make available information currently exempted by law to the GAO, such as transactions with foreign central banks and how the Fed makes certain decisions.

The Federal Reserve has play a major role in exposing taxpayers to huge financial risk by actions taken before and during the financial crisis. Taxpayers deserve sunlight on the process.