I consider this a very interesting event, if for the fact that Bernanke's Re-Appointment as Fed Chief might not be in the bag necessarily. At the very least, there is unprecedented scrutiny being placed upon the Central Bank. Some in the House and the Senate are suggesting that they should strip the Fed of its powers to regulate banks, others believe its activities should be audited. The chairman of the Fed is always fair game for criticism and second guessing, usually over interest rate actions. But this year, the criticism is far more broad based as people have begun to intensely criticize the Fed over its unprecedented bailouts of major Wall Street firms.
There are a lot of places where you can begin to criticize the Federal Reserve's action's over the past year, whether it's their loss sharing agreements with GSE's like Fannie Mae and Freddie Mac, or their low interest loans to the major banks, or their debt management practices (including its policy on directly buying up Treasury Bonds to support prices). How about those mysterious multi-trillion dollar currency flows going to offshore banks that Rep. Alan Grayson (D-FL) believes is a backhanded form of monetization? It would also be interesting to take a look at the Federal Open Market Committee's (FOMC) activities. This is the group that sets policy for the Fed.
A lack of transparency is a real problem with the Fed. It will be the central issue that Bernanke will have to face up to in his confirmation hearings.
The auditors would have a field day, and apparently it might just happen. The Financial Services Committee of the House recently approved an amendment to allow debate on the Audit Bill. It actually has a broad base of support in both parties. These developments are unprecedented, and Bernanke is being forced to answer these questions every time he goes to an oversight committee meeting.
Former Fed Chairman William Martin once said that a central bank's job was to "take away the punch bowl just when everyone is starting to party". Bernanke though has kept interest rates extremely low for the past year or so, thus precipitating a significant bubble in the stock market and other tangible assets (except real estate, where there's still more supply than demand). The worry is that he's not taking the punch bowl away when he should be otherwise.
A lot of foreigners are particularly concerned about this. One the major news stories last week was President Obama’s first official visit to China that, from most reports, was a lesson in humility and maybe reality. According to Friday’s Wall Street Journal, the trip “signaled a turning point in relations between a weakened U.S. power and a China that senses its time has come.” But from my point of view, the most insightful comment came from Liu Mingkang, chairman of the China Banking Regulatory Commission, just prior to Obama’s arrival. According to Wednesday’s Wall Street Journal article titled “China’s Blunt Talk for Obama,” Mingkang said a weak U.S. dollar and low U.S. interest rates had led to “massive speculation” that was inflating asset bubbles around the world. The situation is “seriously impacting global asset prices and encouraging speculation in stock and property markets.”
If the Fed's accommodative zero-interest rate policy isn't altered soon, the consequences of excess speculation and increased debt will create the outcome which the Chinese most likely fear. The Fed may have no real choices; lest they allow the dollar's value to go into a real free fall. But ask yourself, who would benefit from these policies and a falling dollar? What specifically are the historical precedents and political motivations for doing this? I suspect that a free falling dollar is exactly what the Fed and Treasury want, contrary to their public calls for a strong dollar. They see it as a solution to deflation, which reared its head earlier this year as the market plunged. I consider their plan to be very risky and likely to end in strong inflation and the depreciation of the dollar. The international markets know that
The Fed's aggressive intervention in the markets has lead to much of the criticism, with many questioning whether or not the Central Bank's policies has only benefited the "systemically important" banks over the rest of the broader economy. Lawmakers are also upset that the Fed acted without Congressional involvement when it sold off Bear Stearns last year, or when they extended credit to AIG.
Watch for fireworks on this front, especially going into next year. Bernanke will likely win a second term as Fed Chair, but it won't be a cake walk like it usually is for the Fed Chairmen, who usually get the benefit of a doubt. There is a lot of concern over the Fed's actions, from the left, the right and the center.
