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What Will Become of the Federal Reserve?

Felix Salmon has a smart post analyzing the meta-message of Ben Bernanke's testimony this morning. Bernanke, Salmon notes, "starts with 7 paragraphs on general economic conditions, continues with five more paragraphs on the state of the financial sector, and then has six important paragraphs on fiscal policy." That's a bit strange: Fiscal policy is the Treasury Department's domain. The Federal Reserve is the home of monetary policy.

But there's no monetary policy left. Bernanke has brought interest rates as low as he can bring them. He fired all the bullets in his gun. It wasn't enough. That's why the Federal Reserve moved into direct purchasing of securities earlier this year (in this analogy, I guess "quantitative easing" is hand-to-hand combat). That was the appropriate maneuver, most think. Some credit it as the single most important policy intervention in the past two years. The question is if the Fed's extreme maneuvers will become part of its everyday arsenal. "It’s a little disconcerting to see the Fed chairman talk so freely about fiscal policy," concludes Salmon. "Now we’ve reached this point, it’s going to be hard to stop him talking this way, even after the crisis is over."

By Ezra Klein  |  June 3, 2009; 2:00 PM ET
Categories:  Federal Reserve , Financial Crisis , Solutions  
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It's time to bring the Fed into the government. The Fed is strange beast, with the POTUS appointing the Fed Board of Governor's Chair (Greenspawn, Benanke), but all the Fed District Boards appointed by bankers (Timmy's NY Fed Chair prior to Treasury, et. al).

The idea was non-political independence, but what we got was a banker's oligarchy out to protect banker's interests, profits and bonuses. They are the worst possible regulators: where was the NY Fed when the 19 TBTF banks were going underwater through leverage, derivatives and lies?

Way past time for change!

Posted by: JimPortlandOR | June 3, 2009 2:10 PM | Report abuse

Jim: since it's so thoroughly corrupt anyway, why not abolish it?

Posted by: toiletminded | June 3, 2009 6:30 PM | Report abuse

Bernanke is hardly breaking new ground by focusing on fiscal policy. Greenspan used to talk about fiscal policy all the time. Remember how he kept crowing about budget austerity during the Clinton years? (Of course, when Bush was in the whitehouse, concerns over the deficit were hardly forthcoming). Monetary and fiscal policy should go hand-in-hand; there is no point in demanding that the Fed Chairman --who has more control over the world economy than most -- disregard the fiscal side of things. Of course, this works two ways: neither should we demand that monetary policy be completely insulated from criticism by the fiscal policy-controllers.

Posted by: GP11 | June 3, 2009 10:44 PM | Report abuse

I guess the whole point of Bernanke's testimony was how 'monetary policy' applied so far will come a cropper if 'fiscal restraint' is not adopted by the Congress and yes, by White House too. So in that sense Felix is wrong. Looks like he completely missed shouting by the European Czarina called Merkel. Actually, it was a perfect timing and performance by Bernanke in chiding Congress when Merkel’s of the world and resurfaced Bond Vigilantes are taking him to task. How come an experienced journalist like Felix missed all this trans-Atlantic politics?

Also as others have pointed, it does not make sense for Fed not to get pre-occupied with Fiscal part too. They are all joined at hips. Public expects Fed to try best in managing the economy. If it means going over Congress turf and to ruffle some feathers, so be the case.
As the dust would settle, people will start realizing the phenomenal performance and competence shown by Bernanke. He was late in reducing interest rates in early part of last year. But apart from that, this historian of Great Depression has shown extraordinary ‘instinct and courage’ in applying unusual techniques long hiding deep in Fed’s arsenal.

America needs this Fed Chief to hammer fiscal recklessness of this Congress, having gone all along with this Congress and the Administration to move away from the financial Armageddon. Again the real question of value to Americans is not so called ‘institutional proprietary’ or ‘guarding niceties’ in crossing over the organizational responsibilities. Heck with such elegance when we have our Treasury Secretary with a bowl in China. There is no time to worry about who is saying ‘right things’ as long as there is at least someone who dares to say those.

Posted by: umesh409 | June 4, 2009 12:37 AM | Report abuse

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