[ccebook.cn]The World in 2010
[ccebook.cn]The World in 2010
[ccebook.cn]The World in 2010
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United States<br />
<strong>The</strong> Fed's next battle<br />
Nov 13th 2009<br />
This time, with politicians<br />
How tight is Bernanke’s grip?<br />
In the 1930s the Federal Reserve stood by as the economy sank <strong>in</strong>to Depression. Retribution followed as<br />
Frankl<strong>in</strong> Roosevelt concentrated more of its governance <strong>in</strong> Wash<strong>in</strong>gton, DC. Today’s Fed, under its chairman,<br />
Ben Bernanke, has been hyperactive <strong>in</strong> prevent<strong>in</strong>g another Depression, yet aga<strong>in</strong> faces political peril. In <strong>2010</strong><br />
critics <strong>in</strong> Congress will seek to re<strong>in</strong> <strong>in</strong> its <strong>in</strong>dependence even as its defenders <strong>in</strong> the Obama adm<strong>in</strong>istration<br />
push to expand its regulatory powers.<br />
Though its battle aga<strong>in</strong>st the f<strong>in</strong>ancial crisis and recession was heroic, the Fed is blamed for two previous<br />
blunders. First, its easy monetary policy <strong>in</strong> 2003-04 arguably <strong>in</strong>flated a hous<strong>in</strong>g bubble. Second, and less<br />
debatable, the Fed was at best an <strong>in</strong>termittent, at worst a negligent, regulator: it did too little to restra<strong>in</strong><br />
reckless mortgage lend<strong>in</strong>g and allowed f<strong>in</strong>ancial giants such as Citigroup to acquire nearly fatal levels of poorly<br />
understood risk.<br />
No one has a coherent solution for prevent<strong>in</strong>g bubbles with monetary policy. But, on the second po<strong>in</strong>t, many<br />
<strong>in</strong> Congress would like to strip the Fed of oversight of banks. Timothy Geithner, the treasury secretary and a<br />
former Fed official, won’t let that happen. But nor will he succeed <strong>in</strong> extend<strong>in</strong>g the Fed’s reach beyond banks<br />
to any big, risky firm, unless it shares that power with other regulators.<br />
Meanwhile Ron Paul, a Texas Republican and strident critic of the Fed, will succeed <strong>in</strong> open<strong>in</strong>g the Fed’s<br />
lend<strong>in</strong>g and monetary-policy decisions to congressional oversight. But he will compromise on the details so<br />
that the Fed’s effectiveness won’t be hurt much. Some would like to go further by chang<strong>in</strong>g Fed governance,<br />
<strong>in</strong> particular reduc<strong>in</strong>g the relative <strong>in</strong>dependence of its 12 reserve banks. This is so politically explosive (one<br />
must hope, and assume) that it will not happen.<br />
Greg Ip: United States economics editor, <strong>The</strong> Economist<br />
Copyright © 2009 <strong>The</strong> Economist Newspaper and <strong>The</strong> Economist Group. All rights reserved.<br />
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