Analysis: Bernanke's Senate fight may undercut Fed

 FILE - In this Jan. 25, 2010 file photo, Federal Reserve Chairman Ben Bernanke is seen on Capitol Hill in Washington  The Senate has confirmed Bernan...

Bernanke Senate

FILE - In this Jan. 25, 2010 file photo, Federal Reserve Chairman Ben Bernanke is seen on Capitol Hill in Washington The Senate has confirmed Bernan...

Fed Chairman Ben Bernanke survived a Senate battle, bruised. The question is whether the Federal Reserve was scarred, too.
The anti-bailout anger that eroded Bernanke's support in the Senate on Thursday produced the most "no" votes ever on the confirmation of a Fed chairman. That could have lasting impact on the Fed's ability to manage the economy without regard to the political winds.
To shore up his support, Bernanke made the rounds with congressional leaders, meeting privately with senators including Senate Majority Leader Harry Reid and Dick Durbin, the No. 2 Democrat leader in the Senate, in the days leading to Thursday's 70-30 confirmation vote.
Bernanke was in the awkward position of having to lobby for his own job and defend the Fed against efforts to strip it of some of its regulatory authority.
Those meetings alone raise at least the perception of a Fed co-dependency with Congress. What, if any, assurances did Bernanke give lawmakers about interest rates and other Fed policies?
"We don't know what Bernanke agreed to do in those meetings, what he promised," said Allan Meltzer, a professor at Carnegie-Mellon University and author of a history of the central bank. "The Fed's job is to be independent, and the Fed isn't doing that."
The Fed often must make decisions, such as raising interest rates to keep inflation in check, that are unpopular with individuals and companies. Its role in bailing out Wall Street banks to prevent a broader crisis angered the public, too. That's why economists say the Fed's political independence is essential to its mission.
Its interest-rate policy can have huge consequences, affecting everything from large companies, to a homebuyer's ability to get an affordable loan, to the price of cereal. Any influence from the political arena risks compromising the Fed's credibility.
Keeping rates too low for too long could unleash inflation and trigger another speculative bubble like the one in housing that plunged the country into a recession in the first place.
Senate opposition to Bernanke intensified after Republican Scott Brown's upset victory in the Senate race in Massachusetts. Brown's election jolted congressional Democrats and led some to reconsider their support for Bernanke. The Fed chairman's critics cast him as a symbol of the Wall Street bailouts.
"This is a perfect example where the world of politics collides with the world of economics, and the result is not good," said Kenneth Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School.
If the Fed were to lose credibility on Wall Street and from investors around the globe, it would fan inflation pressures and send up interest rates, choking the U.S. economic rebound.
Bank industry lobbyists say Congress' increased scrutiny could lead the Fed to weigh the political consequences of its regulatory actions.
"They will be more aware of the political forces," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, a trade group whose members include the largest banks.
Bernanke's confirmation comes as Congress is writing an overhaul of financial regulations aimed at avoiding another financial crisis.
A House of Representatives bill would remove its power to oversee consumer protections and subject it to a congressional audit. A Senate bill would create a single banking regulator that would strip the Fed of its supervision of bank holding companies, such as Citigroup, JPMorgan Chase and Goldman Sachs.
Even Bernanke's supporters worry about the long-term consequences of his nomination fight.
It sends "the message that the Federal Reserve and its monetary policy decisions are under the thumb of Congress," said Democratic Sen. Chuck Schumer, who voted for Bernanke.
The Fed wasn't always independent.
The Treasury Secretary used to serve on its board. Congress changed that in 1935. And past Fed chairman have battled with Congress and presidents.
Some lawmakers called for Paul Volcker's ouster when the country was gripped by soaring inflation and high unemployment in the late 1970's and early '80s.
"Congress would always love to get its paws on monetary policy," said economic historian John Steel Gordon.
President Lyndon Johnson was so angered by a Fed rate increase that he feared would make it too expensive to expand social programs and fight the Vietnam War that he ordered staffers to find a replacement for Fed Chairman William McChesney Martin. But Martin refused to yield and didn't back down on the rate increase. He became the longest-serving Fed chairman ever.
President Harry Truman also tried to influence the Fed to keep rates low. He summoned the Fed's policy-making committee to the White House, the first and the only president to do so.
Bernanke himself may have hurt the Fed's independence by involving the central bank in deciding to bail out some Wall Street banks but not others, like Lehman Brothers.
The Fed's involvement began in 2008 with its financial backing of a deal letting JP Morgan take over ailing investment house Bear Stearns. But the biggest of all bailouts was for insurance giant American International Group. Eventually, government lifelines to the company would total $182 billion. The Fed provided a $60 billion line of credit to AIG.
"The Fed sacrificed its independence long ago," Meltzer said.
EDITOR'S NOTE _ Jeannine Aversa has covered economics for The Associated Press since 1999.

Updated : 2021-04-19 02:50 GMT+08:00