Bernanke Nomination Moves Ahead as Movement Grows to Reign in the Federal Reserve
By Kim Pearson on December 20, 2009
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Last Thursday, the Senate Banking Committee approved Federal Reserve Chairman Ben Bernanke's renomination to a second term, despite bipartisan opposition from critics who blame him and the central bank for policies contibuting to the financial crisis. His nomination now moves to the Senate floor, where it's likely to pass.
However, the anger reflected in the opposition to Bernanke isn't going away. Even Senate Banking committee chairman Chris Dodd (D-CT) prefaced his statement of support for Bernanke's candidacy by saying,
"Some of the criticisms of the Fed under Chairman Bernanke that have been voiced during this confirmation process have merit.”
Still, Dodd, Pres. Obama and other Bernanke supporters say the Fed chairman efforts to bail out major banks and insurance firms such as Bank of America and AIG helped to avert the complete collapse of the global economy. Time magazine acknowledged Bernanke's central role by naming him its 2009 Person of the Year.
In a failed bid to kill the nomination in committee, persistent Bernanke critic and Banking Committee member Sen. Jim Bunning (R-KY) cited a blogger's comment that Time's nod to Bernanke that
"[T]his was like 'rewarding the Captain of the Titanic for getting everyone off the sinking ship after he rammed it into an iceberg.'”
What's got Bernanke's critics so angry? Michelle Malkin offers:
Via the Mises Institute, here’s a video compilation of his spectacular wrong-headedness about the housing bubble and the state of the economy over the years.
In his Time interview, Bernanke acknowledged that he'd missed some important signs:
"[W]hen I became chairman in 2006, I hoped that my main objectives would be improving the management, communication and monitoring policy. We were certainly aware of the risks of financial crisis, but one as large and as dangerous as this one, I certainly did not anticipate. I wish I had, but I didn't. "
What the Federal Reserve Does - And Why Critics Want Change
However, there is an emerging grass-roots movement calling for fundamental changes in the central banking system, not just the rejection of Bernanke as its chair. These critics argue that the very structure of the system, coupled with policy decisions under Bernanke and his predecessor, Alan Greenspan, set the economic system up for failure. The reach of that movement hit home for me recently when my 17-year-old son started talking about the need to abolish the Federal Reserve. Usually, he's talking about the latest music and fashion trends.
To understand why, it helps to undertand a bit about what the Fed is and what it does. The Federal Reserve system consists of a central bank with regional satellites that sets basic rules for the rest of the financial industry. As this page on the Fed's website explains, it's run by a seven-member Board of Covernors made up of banking, agriculture and industry professionals who are nominated by President and confirmed by the Senate for 14-year terms. Two members of the Board of Governors are selected by the President to serve four-year terms as Board Chair and Vice-Chair.
Critics say the Board's structure sets up an inherent conflict of interest. Here's the way Americans For Financial Reform explains the problem:
"By design, the Federal Reserve is largely under the control of the financial industry. The presidents of the twelve regional Federal Reserve Banks are chosen through a process that is dominated by the banks. Under the current system, each regional bank has nine directors. Three of the directors are chosen directly by the member banks within the district. Three directors, who are supposed to represent the larger community, are selected by the first three directors. The final three directors, who are also supposed to represent the larger community, are appointed by the Board of Governors. The nine directors select the regional bank president who is the chief executive officer for the bank.
"All of these bank presidents sit on the Open Market Committee that determines monetary policy, with the seven members of the Board of Governors appointed by the president. Five of these governors actually vote on monetary policy (four spots rotate among the banks, with the president of the New York Federal Reserve Bank being a permanent voting member). [Timothy Geithner occupied this position from 2003-9, when Pres. Obama chose him to be Secretary of the Treasury.]
"In addition to their large role in determining monetary policy, the district banks also have substantial regulatory powers, especially the New York bank. In effect, the current structure of the Fed is a system in which the banks largely decide who regulate them."
In particular, the Fed sets the "federal funds rate" - the interest rate it charges other banks for short-term loans. Banks use that rate to set the "prime rate," and that determines how easy it is to get credit. The lower the prime rate, the easier it is to get credit. However, if credit gets too easy, speculative loans are more likely. Because Bernanke has continued former Fed chairman Alan Greenspan's policies of keeping the federal funds rate low, critics say he and his colleagues contributed to the subprime mortgage crisis.
The Fed also sets rules for "reserve requirements" -- rules for the amount of cash banks have to have on hand to offset liabilities. Critics note that Greenspan substantially reduced those requirements, and again, Bernanke has continued those policies. Consequently, banks were less likely to be able to cover bad debts, hence the wave of bank failures we've seen in the last few years.
One Solution: Democratize the Fed?
Rep. Marcy Kaptur (D-OH) has a bill in the House of Representatives, HR 3858, Democratizing the Federal Reserve System, that would cut Board members' terms from 14 years to 7 and changing the rules for selecting the chairman and vice-chairman. In this video, economist Jane D'Arista explains why Kaptur's bill needs to become law:
A group calling itself the Coalition for Economic and Social Justice goes further. THe group, whose backers include former Congressman and civil rights leader Walter Fauntroy and former Senator and presidential candidate Mike Gravel, calls for the passage of a "Capital Homestead Act" that would create, in their words:
"[A] comprehensive policy framework that would reform the financial system, democratize governance of the Fed, unify the nation and light a new path for the world."
Taking inspiration from President Abraham Lincoln, the coalition will call on the President to introduce a new direction for Federal Reserve policies. “The Capital Homestead Act,” a proposed 21st century counterpart to Lincoln’s Homestead Act, would channel the Fed’s money creation powers to grow the private sector -- without inflation, increased government debt, or taxpayer dollars.
- An interactive history of the Federal Reserve system
- Take Sen. Bernie Sander's poll on the government's handling of the financial crisis
- Michael Moore has a list of facts (some of which are actually assertions) from his films that include comments on the Federal Reserve
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