By Craig Torres
July 29 (Bloomberg) -- The financial-overhaul plan before Congress leaves the Federal Reserve in the business of lending to everyone from General Electric Co. to investors in student loans. That makes it harder for Chairman Ben S. Bernanke to keep Congress from second-guessing what he does.
Bernanke is trying to deflect a bill, co-sponsored by 276 members of the House of Representatives, that would require audits of central bank operations, including monetary policy decisions, by the Government Accountability Office. Audits wouldn’t be “consistent with independence,” Bernanke said at a Kansas City town hall meeting July 26. “I don’t think the American people want Congress running monetary policy.”
Unless the Fed retreats from unlimited lending, Bernanke can expect such a result, said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh. The more the Fed invades the domain of Congress by supplying credit to businesses and markets outside the banking system, the more Congress will seek a hand in monetary policy, said Goodfriend, a former adviser to the Richmond Fed.
“Central bank independence is incompatible over time with all but limited, temporary last-resort lending” to banks, Goodfriend said in an interview. The Fed’s role in emergency lending “needs to be clarified before the next crisis,” he said.
Congress may demand more say over the Fed’s credit policies. Democratic Representative Paul Kanjorski of Pennsylvania is gathering signatures for a letter asking Bernanke to extend the Term Asset-Backed Securities Loan Facility.
Extending TALF
The TALF, an emergency program that lends to investors to purchase securities backed by consumer and business loans, is set to expire Dec. 31. Bernanke told the Senate Banking Committee July 22 that it would be “difficult” to justify extending the TALF if markets return to normal operations.
Such pressure to keep some lending programs going is likely to complicate future Fed efforts to keep a lid on inflation. Bernanke’s supporters say his actions have been consistent with the central bank’s traditional role as lender of last resort.
“The Fed is best suited to go in quickly if there is a fire,” said Mark Gertler, a New York University economist and research co-author with Bernanke. “But you would like an arrangement where if the assets are held for any period of time, the Treasury takes them over.”
The 88-page financial-overhaul plan the Obama administration submitted to Congress, written by the Treasury with input from the Fed, doesn’t limit whom the central bank can lend to or for how long, beyond the Fed’s own definition of “unusual and exigent circumstances.”
Emergency credit policies have helped more than double the Fed’s balance sheet over the past year to more than $2 trillion, including loans to support insurer American International Group Inc. and risky assets once owned by Bear Stearns Cos.
‘Vast Power’
“The Fed clearly cherishes its vast power to create and spend trillions of dollars,” Texas Republican Representative Ron Paul, who wrote the House bill on Fed audits, said on his Web site. “The only accountability the Federal Reserve has is ultimately to Congress.”
Bernanke told Paul at a House Financial Services Committee hearing last week that GAO audits, often initiated at the request of members of Congress, could be used as a club against the Fed.
“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. “Reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions,” he said in testimony.
Risk Regulator
Congress has stepped up pressure on the Fed partly in reaction to proposals from the Obama administration to give the central bank more authority to regulate risk across the financial system. Lawmakers in both parties have expressed wariness about giving the Fed even more power.
“I understand your concern about the Fed’s independence, but you are the one that threw away the independence by acting as an arm of the Treasury and engaging in fiscal policy,” Kentucky Republican Senator Jim Bunning told Bernanke at a July 22 hearing. “Would you rather have an audit of the Fed or give up all of your non-monetary-policy functions?”
Bernanke told the Financial Services Committee that the Fed’s ability to repair the credit markets demonstrates the value of leaving the central bank with broad lending authority.
“We’ve been fairly successful,” he said.
Lehman Bankruptcy
Bernanke rushed to support credit markets in the wake of the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. By mid- October, investors in top-rated 30-day asset-backed commercial paper demanded returns more than 3 percentage points above the benchmark lending rate, compared with 0.6 percentage point before the Lehman failure. The spread has since narrowed to about 0.4 percentage point.
As markets return to normal, the Fed should say “we are not going to finance these programs anymore and we are getting out of credit-allocation policies,” said Mickey Levy, chief economist at Bank of America Corp. in New York. “The fiscal role the Fed is playing is inconsistent with its longstanding mandate” to achieve stable prices and full employment.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Posts
No comments:
Post a Comment