Congressman Ron Paul

Jon Hilsenrath and Sudeep Reddy of the Wall Street Journal report that Federal Reserve Chairman Ben Bernanke heads to Capitol Hill for the next two days to defend the Federal Reserve from its critics.

Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely. Mr. Paul’s economic ideas sometimes make him the target of ridicule.

Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed. Audits would show “that it’s the Fed that has caused all the mischief” in the U.S. economy, Mr. Paul says.

President Barack Obama has proposed giving the Fed some new powers to oversee financial institutions — but he also wants to limit its authority to make emergency loans like the ones used to bail out American International Group Inc. and Bear Stearns. Meanwhile, the Fed is being pushed to rethink its structure amid concerns that bank-industry executives have too much influence in its actions.

Many Fed critics blame it for the economic crisis. They say it failed as a bank regulator and also fueled a bubble by keeping interest rates too low for years. They also feel Mr. Bernanke, who became chairman in 2006, stretched the Fed’s powers too far by bailing out firms like AIG, pushing Bank of America to complete its Merrill Lynch takeover, and pumping hundreds of billions of dollars into the financial system.

Mr. Bernanke defends his actions. “I don’t regret anything we’ve done,” he said in a recent interview. “If the Fed and the Treasury hadn’t acted” as they did, “then the global economic environment would have been much, much worse than it is today,” he said. “There would have been some risk of a 1930s-style Great Depression. We averted that.”

In his new book, “In Fed We Trust,” WSJ Economics Editor David Wessel examines how Fed Chairman Ben Bernanke has steered the U.S. economy through the “Great Panic.”

He strongly opposes the proposal to audit the Fed, calling it “self-defeating and dangerous.” The risk: If investors see the Fed facing new political oversight, they will doubt its ability to take unpopular steps to fight inflation — one of the Fed’s top jobs. Fearing inflation, bond investors will push interest rates up, hurting the weak economy.

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Both Congress and the White House are pressing for reviews of the Fed’s structure. A prime target: The 12 regional Fed banks that have a say in interest-rate decisions and bank regulation.

Under the 1913 law that created these regional Fed banks — in places like New York, Richmond, San Francisco and Kansas City — local boards choose each bank’s president. The regional boards are composed in part of private bankers.

Critics say this setup makes the regional banks unaccountable and too close to private bankers. “There’s a definite conflict of interest when the banks are involved in selecting their regulators,” says Sen. Shelby.

One solution could be subjecting the presidents to Senate confirmation, but Fed officials oppose that. The Fed could try to head off a fight over the banks by proposing its own reforms, for instance by seeking to change the rules overseeing the private sector directors.

The proposal by Mr. Paul, the Texas lawmaker, for a Fed audit by Congress is the most obvious symptom of skepticism toward the Fed’s autonomous status. Mr. Paul says a “natural consequence” of an audit would be that the public “would be so outraged” about the findings that they will decide to kill the institution entirely.

Mr. Paul, an obstetrician and two-time presidential candidate, considers the Fed to be unconstitutional. He sells “Audit the Fed” T-shirts on his Web site, and his movement has a small but deeply committed following: Supporters even have a dating Web site in his name, “Ron Paul Singles,” where users seek others displeased with the Fed.

Mr. Paul’s bill would repeal limits on audits of the Fed by the Government Accountability Office, opening it to much closer scrutiny from Congress. The GAO already audits some Fed activities, such as its regulation of banks. Mr. Paul’s bill opens other Fed activities — such as interest-rate decisions or trading with other central banks — to more scrutiny.

In May, Mr. Bernanke left a hearing bristling after an exchange with Mr. Paul. Mr. Bernanke said Mr. Paul’s bill would interfere with the Fed’s interest-rate decisions. “I certainly would resist any attempt to dictate to the Federal Reserve how to make monetary policy,” Mr. Bernanke said.

Mr. Paul shot back: “It’s the policy that’s the only thing that really counts.”

Please read the entire article here:
Bernanke Heads to Congress Battling Calls to Tame the Fed

Track H.R.1207 and S.604: Federal Reserve Transparency/Sunshine Act of 2009 here.

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