Why Congress is Furious at the Fed

An angry Congress wants to reshape the central bank. And you can't say it's entirely wrong

By Justin Fox Monday, Dec. 14, 2009

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    There are economic reasons for doing things this way. Shielding the Fed from direct political influence while giving bankers a say in its workings presumably makes it a more resolute defender of the soundness of the dollar. Studies have shown that the more independent of political influence a country's central bank (the Fed is the U.S. central bank) is, the better job it does of fighting inflation. There is a long political tradition in America of pushing the Fed to go easy on interest rates and not be so vigilant about price stability. The 19th century populist movement, while it predated the Fed, was all about promoting inflation and breaking free of the rule of Eastern bankers.

    That's one thing that's a bit odd about Paul's anti-Fed campaign: he pitches it in populist terms but pines for a return to the very gold standard that the original populists decried because it led to credit shortages. Most of Paul's fellow Fed bashers don't share his extreme hard-money beliefs. They're mainly just frustrated about the financial crisis and ensuing recession and looking for a scapegoat. The Fed isn't the worst of scapegoats. It was complacent in the years leading up to the crisis. Its response to the panic could have been worse--as in the early 1930s. Even if its actions have been messy, expensive and unfair, you could say the same, in spades, of the House and Senate. Whatever one thinks ails the Fed, more oversight by Congress seems unlikely to be an improvement.

    Dodd's proposal to strip the Fed of its role in regulating banks, though, isn't mere Fed-bashing. The U.S.'s current regulatory setup is a multiagency muddle. While Fed officials understandably want to maintain their role--or even expand it, as the Obama Administration's reform plans prescribe--it might make sense to centralize regulation in one place, within Treasury. The Fed isn't the source of all evil. But neither should it be sacrosanct.

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