The Wall Street Journal finally acknowledged an issue that's been bubbling quietly since the Bear Stearns Cos. run: the tensions between the Federal Reserve's independent mission as a protector of the currency and its role as an uber-regulator. Suddenly, with the cataclysmic events of the past week, that independence looks increasingly shaky. It's not just that Ben Bernanke appears -- and I emphasize what it looks like from the outside because none of us are in the meetings -- to be serving as a handmaiden to Treasury's Henry Paulson. Indeed, the Fed absorbed some criticism from John McCain Friday, who thinks the central bank should get out of the bailout business (this raises serious questions about the fate of Paulson's regulatory scheme in a McCain administration). And now that Congress has roused itself from its slumber, it's ready to do a little Bernanke roasting, if only to give the appearance that it's protecting the American taxpayer.
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Does this represent a threat to Fed independence? The cynical view is that, hell no, the Fed long ago lost its independence. The sanguine view is that gee whiz, no one in Congress or the administration would think of reeling in the central bank and making it a vassal of Treasury. That would be dumb.
This kind of crossfire with the Fed in the middle is a long American blood sport, and Bernanke, driven by events and (seemingly) Paulson, walked right into it. And just think, Congress hasn't even yet provided the Fed any enabling legislation for its newfound powers. Still, cynical or sanguine, what's the likelihood the Fed will pull a Volcker if the cost of these bailouts and general inflationary pressures crater the dollar and send interest rates spiraling? What's the likelihood that the Fed would take into consideration the needs of the banks when it's formulating monetary policy? The answer: less likely today, all things being equal, than a year ago. And that's saying something. - Robert Teitelman
