Bernanke Faces Greater Scrutiny After Republican Election Gains
Federal Reserve Chairman Ben S. Bernanke may have to renew his battle to preserve the central bank’s independence after Republican victories in yesterday’s congressional elections.
With Republicans reclaiming a majority in the House of Representatives and eroding Democrats’ hold on the Senate, Tea Party candidates who campaigned in part against the Fed get an opportunity to call Bernanke to task for taking part in the unpopular financial rescues that helped propel them to office.
“There’s certainly going to be more hearings and more pressure,” said Mark Calabria, a former Republican Senate Banking Committee aide who is now director of financial- regulation studies at the Cato Institute, a policy research group in Washington that favors free markets.
One new Fed opponent in Congress is Kentucky Senator-elect Rand Paul, who has criticized the Fed for imposing “the sneakiest tax of all -- inflation.” He joins South Carolina’s Jim DeMint, an advocate for Tea Party candidates who backed an unsuccessful bill to subject the Fed’s monetary policy to congressional audits.
The Fed has long faced pressure from the left to help spur growth and jobs. Now, the central bank’s most vocal critics are likely to be conservatives calling for greater scrutiny of its decisions, including its role in bailouts of American International Group Inc. and Bear Stearns Cos.
Six out of 10 self-identified Tea Party supporters who said they were likely to vote supported overhauling or abolishing the Fed, according to a Bloomberg News national poll conducted Oct. 7-10.
Treasuries rose today, sending the yield on 30-year bonds three basis points lower to 3.9 percent. That’s the lowest in more than a week. Two-year notes yielded 0.35 percent, and the yield on the 10-year note fell two basis points to 2.57 percent. The Stoxx Europe 600 Index rose 0.4 percent to 268.66 as of 10:19 a.m. in London, a fifth straight advance.
In an unscientific survey of participants at an August Tea Party rally in Washington that was organized by Fox News commentator Glenn Beck, respondents by a two-to-one margin favored abolishing the Fed. “It’s so secretive,” said Joanne Budynkiewicz, 52, of Chicopee, Mass.
The Senate in May rejected a House-passed measure to audit the Fed that was proposed by Republican Representative Ron Paul of Texas, Rand Paul’s father. Congress ended up approving a compromise that requires disclosure of details of the Fed’s emergency lending and monetary-policy actions during the financial crisis. Information on future bank loans and asset purchases must be released with a two-year lag.
Bernanke argued that audits of monetary policy would compromise the independence of the central bank. A letter he sent to DeMint in May warned that audits would “seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”
Darrell Issa, who would take over as the chairman of the House Oversight and Government Reform Committee and be the Republican’s chief inquisitor of administration, already has the Fed in his sights. This year, he’s pressed the central bank for documents related to the AIG rescue and demanded Bernanke explain his role in authorizing payments to the insurer’s counterparties, calling him an “unindicted co-conspirator” in the bailout.
Scrutiny of the central bank will continue, Issa pledged in an interview last month, saying that Congress must “look in- depth behind the curtain, rather than simply have the Fed chairman come up and lecture us.”
As Rand Paul extolled the merits of the free market on the campaign trail, he blamed the recession on the Fed, saying it sent “bad signals” to markets.
“It wasn’t that the home builder was stupid, or the mortgage broker was stupid,” he said during a July appearance in Kentucky. “It was that they got the wrong signal from the monetary policy of the government.”
Fed policy makers today will announce plans to resume large-scale purchases of securities in a bid to boost economic growth and employment, according to 53 of 56 economists surveyed by Bloomberg News last week. Twenty nine of those surveyed said the Fed will buy at least $500 billion.
Republicans seized control of the U.S. House and, while falling short of winning the Senate, narrowed the chamber’s Democratic majority.
Republicans gained at least 60 House seats yesterday across the country, capitalizing on concerns about government spending and delivering a rebuke to President Barack Obama’s domestic agenda.
As the Senate debated an overhaul of the financial regulatory system this year, support for audits of the Fed came from lawmakers as varied as Bernard Sanders, a Vermont Independent and self-declared socialist, DeMint and Louisiana Republican David Vitter, as well as Democrats like Wisconsin’s Russ Feingold and Oregon’s Ron Wyden.
“You had a really strange alliance last year that supported the audit of the Fed and that may come back into play,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Bernanke, first appointed by President George W. Bush, was reappointed by Obama and won approval for a second four-year term in January with the most congressional opponents since the Senate began confirming Fed chairmen in 1978. Bernanke was opposed by 18 Republicans and 12 members of the Democratic caucus. He was supported by 22 Republicans.
President Barack Obama and his top economic advisers -- including Treasury Secretary Timothy F. Geithner, a former president of the New York Fed -- would oppose any effort to weaken the Fed, said Greg Valliere, chief political strategist at the Potomac Research Group in Washington.
“In the highly unlikely event that an anti-Fed bill passed both houses, it would face an almost-certain veto from President Obama,” said Valliere. “There will be plenty of defenders in both parties, and of course Geithner and the president realize that the Fed is beyond reproach. The middle will hold against the far right and far left when it comes to Fed policy.”
Republicans in Congress will also have the ability to hold up Obama’s appointments to the Federal Reserve board.
The nomination of Peter Diamond, a Massachusetts Institute of Technology professor, hasn’t yet been confirmed in the Senate because of opposition from Republicans such as Alabama Senator Richard Shelby, who questioned Diamond’s qualifications.
Last month, Diamond was awarded the Nobel Prize in economics along with two other economists.
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