While Fed-bashing remains popular on Capitol Hill, legislators demonstrated once again this week how they depend on the central bank to fight financial fires like last week’s market panic.
Even as the Senate moved to slap the Federal Reserve’s hand by demanding an audit of its emergency lending programs during the 2007-08 financial crisis, legislators did nothing to deter Fed actions over the weekend to assist an unprecedented $1 trillion rescue program for highly indebted European countries that was aimed at calming markets.
Federal Reserve Chairman Ben S. Bernanke met privately with key critics in the Senate to explain why the Fed got involved, to forestall any possible concern over his resurrection of an emergency swap program with European central banks to ensure they have enough U.S. dollars on hand to satisfy the needs of European banks and stressed European markets.
Senators emerged from the meetings saying they supported the Fed’s latest emergency program, and hoped it would help to quell the European crisis and prevent it from coming to U.S. shores.
“Chairman Bernanke explained what was going on in Europe. It was basically a European problem, but with ramifications, probably on a lot of our banks and our banking system if there was no intervention,” said Sen. Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking, Housing and Urban Affairs Committee and one of the Fed’s sharpest critics in Congress.
Banking committee members naturally were concerned that European banks stricken by the crisis might stop lending freely to U.S. banks, threatening a revival of the credit crunch that shut down the U.S. economy and caused a deep recession last year.
But Mr. Shelby’s support for the Fed intervention in Europe after a private meeting with Mr. Bernanke on Tuesday afternoon contrasted with the floor speech he gave earlier in the morning blasting the Fed and explaining why he voted for the audit of previous Fed emergency programs.
“The Fed has abused its independence,” he said in his earlier remarks.
Reading deeply into Mr. Shelby’s speech, it becomes clear that what really rankled the senator was the way the Fed has been “playing politics” by objecting to amendments to the financial-reform bill supported by many Republicans, such as the audit provision, while supporting some key provisions championed by Democrats.
In particular, he said, the Fed had catered to the Obama administration by agreeing to a plan to put a powerful new consumer protection agency under the Fed’s umbrella, enabling it to be financed off-budget like the Fed itself and have virtually unlimited access to money without congressional strings attached.
“It’s politics,” said Mr. Shelby. “The reality is that the Fed’s Board of Governors is one of the biggest political players in town.”
But Sen. Bob Corker, a Tennessee Republican more supportive of the Fed, emphasized the important role the central bank plays in shielding U.S. markets and consumers from periodic outbreaks of financial distress around the world.
In launching emergency programs during the 2008 crisis, the Fed for the first time drew on authority Congress granted it during the Great Depression in the 1930s to address economic emergencies. Most of those powers, though used for bailouts, are left largely untouched in the reform bill.
Like other conservative legislators, Mr. Corker said the European crisis should serve as a “wake-up call” for the U.S. Congress, which unlike Greece, Spain and other debt-laden European countries has not even begun to address spiraling U.S. debts that within a few years are expected to rival theirs.
Greece’s efforts to tackle deficits by paring pensions and salaries of government workers, for example, have provoked violent street protests.
“We could very well end up in the same place without having the courage to do the things that are necessary in this country,” Mr. Corker said after meeting with the Fed chairman.
While the Fed was able to placate some legislators with private meetings, as well as the quick public release of information about its agreements with European central banks, a few critics have emerged.
Bill Wilson, president of Americans for Limited Government, a libertarian think tank, said the European program is a prime example of the kind of Fed largesse that Congress should stop. Instead of authorizing a one-time audit of the central bank, he said the Senate should have approved an alternative amendment on Tuesday that would have required constant oversight of such Fed programs.
That alternative amendment, sponsored by Sen. Jim DeMint, South Carolina Republican, and modeled on a House amendment sponsored by Rep. Ron Paul, Texas Republican, was defeated by a vote of 62-37.
“Both bankrupt states and their creditors are getting a bailout” under the European plan, Mr. Wilson said. “The Federal Reserve will continue to operate in secret and with impunity, endangering the financial system, weakening the dollar and subsidizing risky bets in the markets.”
In aiding the European rescue plan, the Fed coordinated with the U.S. Treasury and White House. The administration lobbied European leaders to take dramatic action to arrest the rapid deterioration in global markets last week, after months of European dithering over whether to offer aid.
President Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy over the weekend, to make his concerns known and to call for “resolute steps to build confidence in the markets,” said White House aides. Treasury Secretary Timothy F. Geithner also spoke frequently with his European counterparts.
The result was the bold “shock and awe” rescue program that put an end to the market debacle this week.