Federal Reserve Chairman Ben S. Bernanke is due to be interviewed Thursday by the Senate Banking Committee concerning his likely reappointment as head of the central bank.
Although his reappointment is not in doubt, he will face criticism of the Fed’s role in the financial crisis. Some of his critics are determined to scale back the Fed’s regulatory authority and perhaps rein in its political independence.
In a column in Sunday’s Washington Post, Bernanke criticized two pieces of pending legislation. One bill would strip the Fed of its authority to regulate banks and give the Senate a role in selecting the 12 regional Federal Reserve presidents. The other would empower Congress to “audit” Fed decisions on interest rates and other matters of monetary policy.
The Fed deserves criticism for the easy money policies and lack of regulatory oversight that led us into last year’s credit crisis. But the Fed was resolute in confronting the ensuing financial panic, perhaps averting a depression by providing essential credit and support to financial institutions.
Bernanke acknowledged public outrage over such bailouts. He said: “The government’s actions to avoid financial collapse last fall ”“ as distasteful and unfair as some undoubtedly were ”“ were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity.”
Although the Federal Reserve has much work to do to ensure such intervention is never needed again, it would be unwise to make the central bank more subject to congressional oversight. Monetary policy, in particular, must operate free of the political calculations of elected officials.
Sen. Chris Dodd, D-Conn., argues that the Fed’s efforts at banking oversight have been “an abysmal failure,” and the extent of the financial meltdown gives this claim credibility.
But a congressional reorganization of this responsibility among various federal agencies that also failed to rein in lenders seems unlikely to be an improvement.
Chastened by its failures, the Fed has pledged to establish new policies and tougher oversight for major financial firms. Bernanke said this approach will make it clear that no institution is “too big to fail,” and that the costs of failure will be borne by the industry and not by taxpayers.
Bernanke’s pledges deserve close scrutiny by Congress at his confirmation hearing. But the Fed should retain its regulatory authority; its longtime supervision of banking and monetary policy put it in the best position to know how oversight should be reformed and how it can be enforced.
— Questions? Comments? Contact Managing Editor Nick Cowenhoven at nickc@journaltribune.com or City Editor Kristen Schulze Muszynski at kristenm@journaltribune.com.
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