| Chairman Ben Bernanke's opinion column on | | | | fiscal stimulus package to the continuing low |
| November 29th. In the piece, Bernanke criticized | | | | borrowing costs for financial institutions. Many new |
| proposed legislation before the Senate that would | | | | tools created to address the credit crunch are now |
| seek to curtail powers given to the Fed over its | | | | being unwound, with taxpayer leverage bearing the |
| near-century of existence. With approval of the | | | | costs, most visibly through the TARP paybacks |
| Consumer Financial Protection Agency comes a new | | | | made recently. While the White House may |
| regulatory regime that may also threaten the | | | | browbeat bank CEOs to increase small business |
| dominant paradigm, changing the way business at the | | | | lending, the likely impact is minimal now that the |
| top is done for decades to come. What will the | | | | finance industry is back on more sure footing. This |
| Federal Reserve's role be in this new financial | | | | leaves the Fed as the primary entity responsible for |
| landscape, and how effective will they be in the face | | | | transparency for other banks. Yet legislation allows |
| of continuing economic uncertainty? | | | | the Fed considerable leeway when it comes to |
| The Fed's mission is to balance between the twin | | | | publishing their decisions about interest rates and |
| specters of inflation and unemployment, which sets it | | | | discount window offerings. An obvious need for |
| apart from other central banks around the world, | | | | oversight cannot result in further politicization of the |
| who usually focus primarily on inflation. This means | | | | central bank, but any choice for reform will |
| that the Fed is seen as accountable for job growth | | | | necessitate political compromise, further complicating |
| and productivity in good times, as Alan Greenspan | | | | the issue. Some have called for Ben Bernanke's |
| often did over his tenure as chairman. In tougher | | | | resignation as a way to change direction, but even |
| times, the US central bank assumes responsibility for | | | | with new management the Fed's hands have been |
| propping up spending, as it did over the past two | | | | made to seem tied. By exerting as little political |
| years of recession. By most measures, the | | | | involvement as possible, any movement on the Fed's |
| unemployment target is far off, at a 20+ year high | | | | part to bring their expertise to financial regulation will |
| of 10.2 percent, when compared with short and | | | | result in political cost which they cannot bear. If they |
| medium-term inflation expectations. However, the | | | | try to expand small-business lending through their |
| Fed has remained somewhat quiet on the issue, likely | | | | balance sheet, they further run the risk of stoking |
| fearing increasingly vocal calls for reform that have | | | | inflation, another politically risky move. But little |
| followed the heels of the financial crisis. By focusing | | | | options seem available, now that the economy has |
| on inflation, the Fed is acknowledging a tacit | | | | begun to improve and banks have less impetus to |
| understanding that the recession has made clear: | | | | reform themselves. But if one assumes that |
| Central banks are responsible for banks, and the | | | | unemployment is a high priority now, imagine what |
| government is responsible for consumers. | | | | next year's congressional elections will look like. At |
| Evidence for this strategy is everywhere, from the | | | | least the Fed's directors are appointed. |