Posted on 20 Nov 2009
Political frustration over the rescue of Wall Street and high unemployment erupted in Congress Thursday, with one committee threatening to impose tighter scrutiny on the Federal Reserve and another excoriating Treasury Secretary Timothy Geithner.
The House Financial Services Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron Paul, vociferously opposed by the Fed, that would direct the congressional Government Accountability Office to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. The Fed says the provision threatens its ability to make monetary policy without political interference.
The vote was the latest blow to the central bank, which has been become a lightning rod for politicians responding to popular anger that Wall Street was bailed out while the public was not. The Fed faces a stinging backlash from legislators from both parties who argue that has too much power and too little oversight. On Thursday, the Senate Banking Committee began debating legislation that would largely remove the Fed from bank supervision over the objections of both the Fed and the Obama administration.
The Fed audit provision was added to pending legislation on financial regulation that the committee's chairman, Barney Frank, a Massachusetts Democrat, had planned to put to a vote Thursday. But he abruptly announced late in the afternoon that the bill wouldn't move ahead until after Thanksgiving. The reason: Ten members of the Congressional Black Caucus on the committee said they would oppose the bill to protest a lack of action to address the economic pain borne by their constituents. Although the economy appears to be growing again, lawmakers face increasing pressure in their districts to do more to boost growth and address an unemployment rate now at 10.2% and expected to rise.
Glum views on the economy sparked a retreat from stocks and some commodities, as investors moved to the safety of government debt. The Dow Jones Industrial Average fell 93.87 points to 10332.44.
At the Joint Economic Committee, a band of House Republicans called for the resignation of Mr. Geithner, who, as president of the Federal Reserve Bank of New York, played a major role in last fall's moves to prevent the collapse of the financial system. "The public has lost all confidence in your ability to do the job," said Rep. Kevin Brady, Republican of Texas.
Mr. Geithner, in an unusual public display of pique, fired back. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he told Mr. Brady.
Although several Democrats defended Mr. Geithner at the hearing, some liberal Democrats have been complaining that the Obama administration isn't doing enough to combat unemployment. Rep. Peter DeFazio (D., Ore.) called on Mr. Geithner to resign this week, and said in an interview that Mr. Geithner is too close to Wall Street.
"Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy," the Oregon Democrat said.
One issue that has dogged Mr. Geithner is the rescue of American International Group Inc. last fall. A government oversight report this week charged that the New York Fed caved into demands from Goldman Sachs Group Inc. and other big banks and paid them in full for deals they'd made with the insurer. Mr. Geithner said Thursday the government lacked powers it needed to handle the collapse of a financial company that wasn't legally organized as a bank. "Coming into AIG we had, basically, duct tape and string," he said. The legislation pending in Congress would give the government new powers to manage such a situation.
Mr. Paul, author of a new best-seller titled "End the Fed," long has been a critic of the Fed. His economic views make him an outlier in Congress, but his attacks on the Fed have resonated in Congress and with the public.
The Paul provision, and the legislation to which it is attached, would have to clear the full House and Senate before becoming law. Though many lawmakers insist they won't do anything to compromise the Fed's independence on monetary policy, the provision's momentum is substantial. It could, however, be diluted before any bill reaches the president.
"Everybody would like to beat up on the Fed and make them the bad guy," said Rep. Melvin Watt (D., N.C.), who opposed Mr. Paul's measure. He said audits would "substantially castrate the Fed so it cannot do what it was set up to do."
Fed Chairman Ben Bernanke has crisscrossed the Capitol in recent weeks, attempting to fend off legislation that would curtail the Fed's power or independence. Lawmakers with whom he has met said he has reminded them how close the U.S. came to economic catastrophe last year and maintained that the Fed's actions were critical to bringing the economy back to growth.
But Mr. Bernanke faced a skeptical audience. Some lawmakers told him Americans are angry and want more oversight; others said the crisis demanded a rethinking of the U.S. approach to financial regulation.
"What he says is that at that point in time, with our economy literally ready to tip over the edge, he did a series of things he thought were absolutely necessary," said Sen. Mike Johanns, a Nebraska Republican.
"He was trying to convey that this point in time was enormously serious, and the country was about ready to lock up from an economic standpoint. He just says, 'Look, I did what I thought I had to to keep the country going,'" he said.
In an interview, former Fed Chairman Alan Greenspan said it would be "a major loss to the country if the Fed were incapable of running an independent monetary policy. If you have the GAO, after the fact, offering its opinions on whether a certain monetary policy action is correct or incorrect, the active deliberations that are so critical to building a meaningful consensus at the FOMC will begin to become unhelpfully cautious."
Mr. Paul maintained that his amendment wouldn't hinder monetary policy, but instead remove a veil of secrecy at the central bank that's unique within U.S. government. At the Fed, "there's plenty of political influence going on now -- presidential politics, influence by Goldman Sachs and the banking industry," he said. "It's all done in secret."
Congressional auditors have been blocked from reviewing the Fed's monetary policy operations, its loans to foreign governments and direct lending to banks since 1978, when a law was passed to shield the central bank from politics. Auditors already have access to the Fed's operations outside of monetary policy, including bank supervision and the special loan facilities created to rescue specific institutions, such as AIG and Bear Stearns Cos.
GAO audits could publicly reveal reams of information that now remain private, sometimes indefinitely. The Fed doesn't identify banks to whom it lends directly for fear of sparking a disruptive run on the bank. It has suggested that it might be willing to release that information after a lag.
The Fed in the past has resisted calls to release information, only to relent. In the 1990s, for instance, after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag. Mr. Paul's proposal would delay GAO access to Fed decisions for six months. A companion Senate measure has drawn support from about a third of that chamber.
"If there's anything worse than a secret Federal Reserve, it's Congress controlling it," said Sen. Jim DeMint, Republican of South Carolina. "But I do think that there's a wide majority of Americans who want to know what the Federal Reserve is doing and to make sure that it's achieving its primary purpose, which is to protect the value of our dollar."