For most of its 95-year history, the Federal Reserve has been a pretty sleepy, opaque institution. No more.
In just the past few weeks, the debate over how to prevent the next financial meltdown has erupted into a pitched battle among the Fed, Treasury and a host of lesser financial regulators.
Battered by withering criticism of the central bank’s role in the housing bubble, its lax regulation of predatory lenders and unprecedented, trillion-dollar intervention in the global financial system, some members of Congress now want to put the central bank on a shorter leash.
In response, Fed Chairman Ben Bernanke has launched something of a charm offensive.
The latest salvo is a virtually unprecedented “town hall” style meeting produced by the PBS television network Sunday, where Bernanke took the Fed’s case directly to the American public.
At the forum held in Kansas City, Mo., Bernanke said he had to “hold my nose” over last year’s taxpayer-financed bailouts of big financial companies, but also argued that the action had to be taken to avoid a major meltdown of the U.S. financial system and the broader economy.
The Fed chairman's town hall meeting would have been unimaginable in the 18-year tenure of Bernanke's predecessor, Alan Greenspan, who spoke only in carefully managed speeches and Capitol Hill appearances, and then in Delphi-like utterances that were left open to interpretation.
The Fed has operated in relative secrecy for much of its 95-year history. Until February 1994, for example, the Fed’s rate-setting Open Market Committee didn’t even announce its decisions for more than a month, leaving it to bond traders to surmise when policymakers had decided to change rates. That element of surprise helped amplify the power of monetary policy changes: No trader wanted to be caught on the wrong side of the Fed when it made its move.
In public, Fed officials stuck closely to scripted statements or spoke an imponderable technical dialect known only to a handful of academics and Wall Street “Fed watchers.” Because the weight of a Fed official’s actions carried near-mythical impact, a slip of the tongue or an unguarded moment of candor could send the dollar plunging or bond market reeling.
But over the past decade, the Fed has gradually worked to increase the “transparency” of its operations, pulling back the veil with fuller disclosure of policy debates and tolerating increasingly outspoken public comments by individual Fed governors and regional presidents.
That gradual shift accelerated abruptly last fall, when the global financial collapse shoved Bernanke, a soft-spoken former Princeton professor, into the glare of the public spotlight.
“With all that’s gone on in the last year and a half — the crisis and the bailout and the populist outcry from the public — my assumption is that he thinks that a lot more transparency is needed under the current circumstances," said former Dallas Fed President Robert McTeer. "He’s hoping to explain and make sense of what the Fed’s doing.”
Since the financial crisis began last September, Bernanke has dramatically expanded his public access and appearances beyond the wildest imaginings of any of his predecessors. From a high-profile interview on CBS' "60 Minutes" in March to a televised question-and-answer session with students from Morehouse College in April, the chairman has departed from the usual scripted speeches. The PBS town hall promises to raise his profile even further, just as some Washington insiders are questioning whether Bernanke will get a second four-year term as Fed chairman when his term expires Jan. 31.
Beyond the public's general awareness of interest rates, the intricacies of Fed monetary policy — the reverse repurchase agreements, currency swaps and discount window borrowings —aren’t typically a discussion topic at family summer barbecues. But the historic scope and high profile of the Fed’s actions over the past 18 months have not gone unnoticed on Main Street.
“What I'm hearing from my constituents, what members are hearing across the country, is that people are fearful that their dollar isn't worth a dollar any longer,” said Rep. Michelle Bachman, R-Minn.
The financial crisis also has spotlighted the Fed’s role in the meltdown. Critics of the Greenspan Fed argue that after suppressing interest rates to overcome the shocks of the Internet bust and the 9/11 attacks, the central bank kept rates too low, for too long, helping to fuel the housing bubble.
The Fed also failed in its responsibility as a bank regulator, many critics argue. As of last week, the Fed was still dithering over tougher rules requiring mortgage lenders to provide “plain English” explanations for the mind-bogglingly complex loans that have helped send one in 10 American homeowners into default.
“In the Fed's role as a regulator, I think they failed the American people,” said Sen. Richard Shelby, R-Ala., the ranking member of the Senate Banking Committee. “You have to say that they were totally inadequate to the task at hand.”
Now, as Congress and the White House debate a broad overhaul of financial regulations, Bernanke is locked in a tug-of-war with Treasury Secretary Tim Geithner and other regulators over which agency should be given expanded powers to prevent another meltdown.
On Capitol Hill Friday, Bernanke and Geithner squared off on the question of just who should be granted new powers to protect consumers from predatory lending, monitor the overall risk to the system and shut down rogue bankers if they they threaten to again push the financial system to the brink.
Some members of Congress think the Fed, as an unelected body, needs more oversight, not more power. Rep. Ron Paul, R-Texas, has introduced a bill calling for an “audit” of the Fed by the Government Accountability Office, the investigative arm of the Congress. Though the Fed’s books are already heavily audited, a GAO review would likely go much further helping the Fed’s critics second-guess its decision making.
Others in Congress want to limit the Fed’s broad powers — specifically Section 13-3 of its charter, which allowed the central bank to declare unilaterally last fall that “exigent circumstances” gave it unchecked authority to funnel hundreds of billions of dollars of new money to failing financial institutions by buying up their dodgy investments. Some members of Congress want to restrict the amount of money the Fed can dole out and the types of investment it can make.
“I like the fact that (Bernanke) has taken a conservative or limited view of what 13-3 provides,” said Rep Brad Sherman, D-Calif. “But I think we ought to make sure the future Fed chairman also takes a limited view by making it more clear.”
The timing of Bernanke’s charm offensive also coincides with early discussions on the question of his reappointment as chairman when his four-year term expires on January 31, 2010. Bernanke is eligible to continue serving as a member of the Fed's board until 2020. President Barack Obama has given no indication, so far, of whether he is considering a change.
But that hasn’t stopped Washington from speculating on a possible Bernanke successor. One leading candidate is former Treasury Secretary Lawrence Summers, who now serves as head of Obama’s National Economic Council. After a stormy tenure as president of Harvard University, Summer also stirred controversy for accepting lucrative speaking fees from Wall Street firms that got government bailout money.
Last week, Sen. Jim Bunning, R-Kan., a member of the Senate Banking and Finance committees who opposed Bernanke’s nominations as Fed chairman, predicted that Summers will replace Bernanke.
But Bernanke’s supporters say he still enjoys strong support from the White House.
“If the president replaces (Bernanke) with Larry Summers, it will be so he doesn’t have to see Larry Summers every morning before breakfast,” said McTeer. “You know what a strain that must be on the president.”
The Associated Press and Reuters contributed to this report.