Bernanke Warns Congress Not to Limit the Central Bank’s Independence

Fed Chairman Ben Bernanke has written an opinion piece in Sunday’s Washington Post where he attacks congressional proposals to audit the Fed and strip it of most of its regulatory powers.

According to Bernanke, Capitol Hill attempts to audit the central bank and restrict its regulatory reach could be dangerous for the economy.

“These measures”, Bernanke writes, “are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States”.

While Mr. Bernanke’s taking to penning occasional op-ed pieces is not unusual, Sunday’s rare newspaper column — which comes days ahead of his confirmation hearing (scheduled for Thursday/Dec.3) for a second four-year term as the Chairman of the central bank — clearly attacks a proposal in the Senate to strip the Federal Reserve of its bank regulatory powers and a House Financial Services Committee vote to audit monetary policy deliberations and actions.

Mr. Bernanke in more than one occasion has defended the Central Banks’ unprecedented actions of doubling of its balance sheet to over $2 trillion to prevent a financial collapse, and has also explained the Fed’s position and its exit strategy once it decides it is safe to take the economy off life support.

“The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society,” Bernanke wrote.

Lawmakers however, seem unhappy with the fact the Fed has taken on too much authority. They are also angry with the agency over its emergency bailouts of major financial firms and its failure to prevent the contagion of mortgage delinquencies. That is way they want the Fed to restrict itself in the future to setting monetary policy.

Bernanke obviously strongly disagrees wit that approach, saying that, while reforms are needed, “the institution’s ability to foster financial stability and to promote economic recovery without inflation, ” should be preserved rather than degraded.

Allowing audits of the Fed’s monetary policy — as proposed by legislation — would increase the perceived influence of Congress on interest rate decisions, he said.

“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery,” Bernanke wrote.

We think the Fed Chairman is right. While the Fed as an institution may not be perfect — more transparency always helps since it makes monetary policy under discretion credible and transparent — it has certainly proved itself in more than in one occasion to be technically competent over several decades, many of which were periods of financial crisis.