Don’t Politicize The Fed

If all you were focusing on was Congress’ reaction to the Federal Reserve’s actions since the financial crisis, you might ask yourself “why is everyone worried about partisanship?” Heavy players on the left and right have wanted the Fed to be more transparent, open up its books, and do more to fix the economy. While Republican Presidential Candidate Ron Paul has advocated for getting rid of the agency altogether, Congressman Barney Frank, ranking member of the Financial Services Committee, recently introduced legislation that would make the agency succumb to political friction.

It is the Fed’s job to keep an eye on the economy and make sure employment is high. That meant giving hundreds of billions of dollars to banks so they were able to keep lending money, and then giving them even more money when the entire financial system collapsed. All the bad loans banks made were, and still are, on the books of the Fed. That means (since the Fed runs on taxpayer money) American’s own all the bad bets banks made and now have to figure out a way to pay it back.

But if the economy does get going again the Fed would be able to pay those bets back. They have held interest rates at zero which is supposed to increase lending, and they found a way to give them more money with a policy called quantitative easing (QE), which they used not once but twice. While people disagree QE’s effectiveness most agree it helped to a certain extent because it gave banks more wiggle room. But banks are still afraid to lend and businesses are afraid to spend. But is this the Fed’s fault? Many analysts blame this economic quagmire on Congress because businesses leaders are unable to predict what will happen in the long or short term.

But Congress’ hands are tied as well. With every spending bill being seen as some sort of brinkmanship it has become increasingly harder to get any type of legislation passed. So instead of Congress doing something, Frank believes the Fed should have the power to do more. His legislation will have the Governors, which make up the Fed’s board, an elected position. This would replace the current system of the President nominating the Governors and the Senate having to approve them. In theory, this would make them accountable to the people and if the economy did not get better to their satisfaction they could elect new Governors. It would give them more influence because they can say the power of “the people” is behind them.

Frank is one of the leading voices in Congress when it comes to banking, but it seems he forgot that the Fed was not supposed to be made part of the political arena. Some things go beyond politics and the economy is definitely one of them. Those deciding how much the banks should have to keep in their reserve funds and what interest rates should be have an enormous effect on the types of economies we will be living in. These decisions are big enough to worry about, especially in these times that being reelected should be the last thing people making them should be thinking about. Besides, where else are we going to hear someone say it is American consumer’s fault the economy is still not getting better?

I also have to wonder what makes Frank think that people would want to run for these positions. While there are supposed to be 7 Governors on the board, the President has not been able to find 2 others who want the job. That’s either because the confirmation by the Senate would be too much for them, or they are asking themselves why they would want to get involved in trying to solve this mess? It should not come as a surprise that most of Obama’s economic team left after just two years. This is not a fun situation to be dealing with, no matter where you are sitting.

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Filed under Ben Bernanke, Economics

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