Bernanke Jabs Back at Fed's Critics In Congress
July 22, 2009
Federal Reserve Chairman Ben S. Bernanke launched a more aggressive defense of the central bank's multitrillion-dollar campaign to prop up the economy, as government bailouts came under fire Tuesday from all directions on Capitol Hill.
Written by Neil Irwin, The Washington Post
Federal Reserve Chairman Ben Bernanke, right, is greeted by House Financial Services Committee Chairman Barney Frank, D-Mass., as he arrives to deliver a report on the country's economic and financial health before the House Financial Services Committee, on Capitol Hill in Washington, Tuesday, July 21, 2009. (AP Photo/J. Scott Applewhite) (J. Scott Applewhite - AP)
Federal Reserve Chairman Ben S. Bernanke launched a more aggressive defense of the central bank's multitrillion-dollar campaign to prop up the economy, as government bailouts came under fire Tuesday from all directions on Capitol Hill.
Lawmakers were reluctant to second-guess rescues and interventions in the darkest days of the financial crisis. But now, with the financial system stabilizing and the unemployment rate at 9.5 percent and climbing, there is deepening frustration in Congress and around the country that there is not more to show from the trillions of dollars the government has put at risk.
Bernanke argued before the House Financial Services Committee that the Fed's actions helped prevent a global economic calamity, and he promised an exit strategy to head off fears of inflation. His comments came as other government officials were also sharply criticized for their handling of the financial rescue.
Just down the hall, a separate House committee assailed the Treasury Department's execution of the financial system rescue, arguing that it has been deployed without enough accountability. "The taxpayers now have a $700 billion spending program that's being run under the philosophy of 'don't ask, don't tell,' " said Rep. Edolphus Towns (D-N.Y.) in a hearing on the Troubled Assets Relief Program.
In the same building, members of a third committee were enraged that Chrysler and General Motors dealerships in their districts were being shut down despite government bailouts of the companies. [Related stories, A11.]
The specific complaints vary among lawmakers and, especially, between the two parties -- Democrats are more concerned that the rescues are helping big companies but not ordinary Americans, while Republicans are worried about government meddling in private industry. Members of both parties want the Fed, the Treasury and other agencies to be more open with Congress and the public about what they are doing.
Bernanke's appearance is only the beginning of a broader defense of the Fed's actions over the past two years. With the central bank under more extensive fire than it has been in a quarter-century, the mild-mannered economics professor is taking a more aggressive stance in explaining Fed policy than he has in the past.
That effort is likely to continue in two more appearances before Congress this week and at a town-hall-style appearance in Kansas City, Mo., being taped Sunday night, to be hosted by PBS anchor Jim Lehrer and to include questions posed by audience members.
Typically, Bernanke begins his semiannual testimony on monetary policy with a dry statement on the state of the economy. ("As you are aware, the U.S. economy is undergoing a severe contraction" was the opener in February.)
On Tuesday, he opened his remarks much more forcefully: "Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system."
Bernanke argued that "many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve," including cutting interest rates nearly to zero and complex new programs to restart lending.
"He came out swinging," said Michael Feroli, a senior economist at J.P. Morgan Chase. "It seemed like a pretty pointed response to some of the Fed's critics."
Confronted with concerns that the Fed's actions could promote inflation, Bernanke explained how the central bank plans to unwind its $2 trillion balance sheet. (Before the crisis, it had only about $800 billion in assets on its books.)
Until now, Fed officials have spoken only vaguely of how they will reverse their interventions, for two reasons. They have feared that if they talk about how they will move away from policies that stimulate the economy, investors might incorrectly interpret that to mean they will do so soon. And only now that the financial crisis has moderated have they had the time to develop a detailed exit strategy; until a few months ago, they were working nights and weekends just trying to keep the wheels from coming off of the world financial system.
Bernanke's strategy is to separate the "when" of winding down the Fed programs -- which is probably quite a ways off, barring a rapid rebound in the economy -- from the "how." He plans to use the Fed's power to pay interest on bank reserves to suck money out of circulation and raise interest rates.
The most spirited exchanges were over a bill, long advocated by Rep. Ron Paul (R-Tex.) and now sponsored by a majority of House members, to allow the Government Accountability Office to audit the Fed's conduct of monetary policy. Paul has pushed the bill for years, but on Tuesday, Bernanke offered his first detailed explanation of why he thinks it is a bad idea.
Bernanke and many private economists view GAO audits of monetary policy as a threat to the central bank's independence and credibility in fighting inflation, thinking it likely that Congress will order up investigations whenever the Fed is raising interest rates. He argued that such investigations could lead investors to expect higher inflation in the longer run.
"There's nobody in the Congress going to be monitoring" the Fed's policymaking committee, Paul argued, making the case that his bill would allow only for review of Fed interest rate decisions afterward.
"If we were to raise interest rates at a meeting and someone in the Congress didn't like that and said, 'I want the GAO to audit that decision,' wouldn't that be viewed as an interference?" Bernanke asked.
"This is just reviewing it," Paul said. "And you can do what you want."
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