In separate reports today, we’ve briefed clients on the tough going the FRB encountered in both Senate Banking and the Permanent Investigations Subcommittee. Some may think that, with GOP control, the Senate will let the Fed alone. But, with fewer moderates left in each party who see the value of the central bank, the Fed faces a well-armed firing squad coming from both the left and right. What’s a poor Board to do?
Some of the Fed’s problems are not of its making. Since its founding, the U.S. has been a profoundly populist country with deep-rooted fears about putting too much power – economic as well as political – in too few hands. In sharp contrast to European nations, most of which had central banks in the 17th century, the U.S. fought hard against anything like the Fed until the combination of progressive politics and a series of market crashes led to the 1913 Act that brought it forth. Even then, though, the Federal Reserve was limited in many respects and, ever since, it’s never been loved or trusted. Respect is the best for which the Fed can hope, and to keep that strong, it has to do a lot right a lot of the time.
The FRB has of course changed dramatically since 1913 and, despite all of the nation’s continued misgivings about a powerful central bank, it has actually gained authority with each crisis. The Depression led to broader monetary policy authority, the 1970s slump gave the Fed control over the payment system, the 1980s reinforced the FRB’s power to determine big-bank business lines, and the last disaster in 2008 of course handed the FRB the systemic-regulatory rubric.
Why does the FRB always end up the big winner after bad things happen? It’s not that policy-makers and the public like it any better than they did in 1913 – it’s just that Congress can’t think of anyone else. This was surely the case in 2008, when several versions of Dodd-Frank stripped the FRB supervisory power until Congress realized then it would go to the OCC – a no-no for community banks, who promptly killed off that concept.
Inadvertently built ever bigger, the Fed is now – as critics rightly point out – the largest center of unilateral power exempt from Congressional appropriations and most of the other longstanding requirements for public accountability applied to other agencies.
If you’re this big and this powerful, you had better be darn good not only at what you do, but also at how you explain yourself. I think the Fed’s current vulnerability is that it has had problems doing both.
The current legacy makes the Board particularly vulnerable. The Fed’s supervisory record before the crisis is tarnished, as was the monetary policy that helped to precipitate the Great Recession. Since then, the Board has adopted innovative policies that have kept disaster at bay, but it has difficulty being recognized for this. It’s simply a lot easier to know what you don’t have – a strong recovery – than to be thankful for what kept it from being far worse.
In a perverse way, the Fed’s newfound transparency has also compounded its political risk. The Board under Chairman Bernanke renounced the Yoda-like prognostications favored by Alan Greenspan. It did not, though, add to that the astute inside-the-Beltway skills Mr. Greenspan mustered to charm his really important critics in the press and on Capitol Hill. Transparency instills greater market confidence when times are tough, but it also puts a lot more decisions under public scrutiny precisely when external economics put the Fed in its most vulnerable position. Add to this initial Fed disregard for GOP critics on the right – disregard they take as contempt – and one has the perfect storm of a well-meaning Fed making itself vulnerable by explaining itself to an audience looking only for reasons to dislike and distrust it.