Sweating the Fed


Ben Bernanke works at the main intersection of Wall Street and politics, which also happens to be the place where conservatives’ hesitation about “Change!” most deeply abrades the Democrats’ mania for it. Bernanke, who is being sweated by senators soon to vote on retaining him as chairman of the Federal Reserve, is the principal architect of the government’s interventions in the banking industry during the financial crisis. That intervention probably represented the best available course of action in the circumstances, and it very likely averted a much worse recession than the one we’ve experienced.

Prudent it may have been, it is not popular, which makes Bernanke an attractive target. Members of Congress, who resent the Fed’s clout and its independence are using Bernanke’s hearings to grandstand for their own narrow interests, which range from Democrats’ appetite for a second helping of stimulus spending, on top of the $787 billion they already have served up, to Ron Paul and Barney Frank’s odd-couple campaign to involve Congress in the Fed’s interest-rate decisions.

Bernanke has earned himself some enemies — enemies to be proud of. Beyond his role in the bailouts, he has expressed diplomatically muted skepticism about a possible second round of stimulus spending, noting that most of the money appropriated for the first round has not yet been spent and that it is therefore impossible to assess the spending’s efficacy. He has, in general, been a voice of moderation in a Washington establishment disinclined to hear it. Populists are in the mood to rock the boat; Bernanke points out that the water is deep and cold.

Bernanke is not expected to lose his job, so the hearings are mostly a pageant. But the performance is not a trivial one: The U.S. economy remains fragile, and the first order of business for Bernanke and the Fed is to lead the slow return to financial normalcy while standing ready to mitigate the effects of any unexpected economic shocks that may come — and hoping that none of those shocks overwhelms their ability to respond to it. In our unbalanced situation, to press for radical restructuring at the Fed, as Paul and Frank do, is hazardous.

It is also a little dishonest: Ron Paul does not want merely to audit the Fed, but to abolish it. Paul, a puritanical libertarian whose commitment to such antediluvian projects as outlawing fractional-reserve banking and disbanding the military have made him a figure of fun, says he simply wants to have a look at the Fed’s books. But the Fed already is audited by both government and private auditors. It is not, however, audited by Congress — because it is by design independent of Congress. But apparently even the libertarians in Congress believe that there is no corner into which legislators’ many hands and long noses should not reach.

You wouldn’t know it to hear Bernanke speak lately, but the Fed’s main job is to maintain price stability. For the past many decades, that has come to mean keeping a damper on inflation, a critically important task. We have severe unemployment and jaw-dropping deficits that Democrats are laboring mightily to make worse. The dollar and the creditworthiness of the U.S. government are objects of skepticism, and a serious spike in inflation would exacerbate that.

Given these delicate circumstances, it is no time to go mucking about with the central bank. The question is not so much the particular one of Bernanke’s leadership — he has been a very able public servant in our estimate but is by no means indispensable — but rather one of the institutional continuity of the Fed and its mission. Even those who share Ron Paul’s suspicions of the independent central bank must, if they are sober, conclude that a central bank in thrall to the short-term political needs of congressmen would be a catastrophe. And an audit? Tell us: How much credibility does Congress have when it comes to questions about balancing the books?

Neither the Fed nor the Treasury nor the FDIC has functioned flawlessly throughout this crisis, but together they have functioned well enough: better, even, than many had expected, and Bernanke’s clear thinking has helped to unify and coordinate their efforts. Independence is the Fed’s characteristic virtue, as solvency is the FDIC’s and creditworthiness is the Treasury’s.

So, what to do? Begin by reconfirming Bernanke and keeping Congress’s mitts off the Fed as he works to wind down TARP and related initiatives.

And if Congress is keenly interested in balancing books, it might look to its own first.