Ben S. Bernanke's four years as chairman of the Federal Reserve Board of Governors have been as challenging as any chairman's since the Depression. He moved with uncommon alacrity and creativity, forcing down interest rates and injecting hundreds of billions of dollars into the financial system after a series of high-profile collapses on Wall Street threatened to wreck the U.S. economy. No one can say for sure, but we (and many leading economists) are convinced that the recession would have been far worse had the Fed acted more timidly.
All the same, numerous members of Congress don't want Bernanke to be confirmed for a second term. Some even want to strip the Fed of some of its powers or subject it to more congressional audits. We think the Senate should grant Bernanke another four years without demanding additional authority to scrutinize monetary policy. But Congress should explore ways to bring more accountability to the Fed's use of its other powers to influence the economy.
Bernanke's critics note that he was a member of the board of governors from 2002 to 2005, when it kept interest rates extremely low for an extended period -- too extended, as economists would eventually conclude. They also complain that the Fed failed to stop banks from engaging in predatory lending or making risky bets on securities backed by exotic mortgages. And after the bubble burst, they say, the Fed shielded banks too much from losses and disclosed too little about the winners and losers.
These criticisms are valid, but such failings were widely shared in Washington. Bernanke's experience will prove invaluable as the Fed wrestles with the overlapping challenges it faces: how to bring the interest-rate target back up to a normal level without stunting the economic recovery. Bernanke has seen how damaging it can be for the central bank to cling too long to easy-money policies; in fact, economist Allan Meltzer, a noted historian of the Fed, argues that the current policy is already hurting the recovery because it discourages lending. But Bernanke is also a scholar of the Depression, so he knows how the Fed can exacerbate a downturn by tightening the monetary supply at the wrong time.
The push by lawmakers to clamp down on the Fed arises largely from anger about the multibillion-dollar rescues of Wall Street titans in late 2008 and the huge profits that several of them racked up this year. More than 300 House members have cosponsored a proposal by Rep. Ron Paul (R-Texas), a longtime opponent of the Fed, to allow Congress to order audits of all the central bank's actions. The Government Accountability Office already reviews some of the Fed's activities, and its balance sheet is subject to independent audits. But Paul's proposal, which the House recently approved as part of a bill to overhaul bank regulation, would let the GAO audit the Fed's moves on monetary policy.
The Fed remains too secretive about some of those moves, such as the exact steps it takes to implement its interest-rate targets. But given that the governors already reveal those targets as soon as they're set, and release the minutes of their closed-door meetings after a three-week delay, it's not clear how much more information the public needs to be able to second-guess the Fed. Instead, Paul's proposal would just give lawmakers another way to browbeat the Fed to adopt monetary policies more popular with the voters back home, regardless of whether they advance the Fed’s core missions of fighting inflation and promoting full employment.
Rather than trying to diminish the Fed's independence on interest rates, lawmakers should focus on helping the Fed do a better job on its other responsibilities, particularly supervising and stabilizing the banking system. It's critically important that Congress come up with a better way to protect the economy from widespread damage when giant lenders stumble. The Fed could benefit from more transparency in those areas too, particularly when it shores up a failing financial institution (as it did with American International Group) or swaps cash for banks' troubled assets in the hope of easing a credit crunch. Bernanke's Fed took such extraordinary steps at the height of the financial crisis, and our economy is probably better off as a consequence. But by keeping some key details about those operations under wraps -- such as the identities of the AIG trading partners that were repaid in full after the government takeover -- it has stoked the populist cynicism that sustains ill-conceived proposals such as Paul's.