Fed under fire

I’ve been talking to some longtime Fed watchers ahead of Bernanke’s re-confirmation hearing on Thursday and I’m struck by how bad Fed-Congress relations are. Meltzer – the unofficial historian of the US central bank – tells me the situation is worse than at any point in the Fed’s history. There is real concern that some of the proposals before Congress to curtail the power of the Fed and curtail its independence will end up becoming law.

This is a tragedy not just because some of these proposals (not all) could do real harm, but because the desire to cut the Fed down to size is forestalling discussion of issues I think should be high on the post-crisis agenda for the institution.

We should be having a debate about a) cleaning up the Fed’s balance sheet and transfering non-Treasury assets to the government in return for Treasuries b) making the Fed more accountable via a defined inflation target c) establishing an accord to govern how the Fed should conduct so-called credit policies in a future crisis d) how to get the Fed out of the business of bailing out systemically important individual firms by giving a special bankruptcy agency the tools it needs to manage such failures e) what systemic risk powers the Fed needs to tackle future bubbles.

I hope the Senate Banking Committee will keep the debate constructive and get on to some of these issues. Let’s see…

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