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Contents Independence, Transparency, and the Federal Reserve Monetary Policy and Motivations Incentives for Fed Independence Monetary Policy and Motivations Incentives to Check the Fed's Authority To What Degree Can the Fed Call Its Own Shots? Transparency Mandate Appointments Congressional Oversight A Contingent Reality Are Changes in Store?

I don't know whether the devils we're going to come to know are going to be any better or worse than the devils we now know. But the fact is we know those devils and we don't know what the new devils are going to do. If we have a turnover of a quarter to a third of the House and similar types of numbers in the Senate, we would have to be concerned about developing relationships with a new group of people who may not know of our independence. In fact, we take a higher risk next year. I would think we'd want to be able to look back and have them look back on our performance as one that is commendable and beyond reproach because, while they may get bounced… we face some risk in that process as well. (Meeting, p 29)

— Lawrence Lindsey, member of the Board of Governors of the Federal Reserve System, during a closed meeting of the Federal Open Market Committee, March 31, 1992 (seven months prior to a presidential election, and immediately following a breaking scandal which revealed that the United States House of Representatives allowed members to overdraw their House checking accounts)

Obama Attends Meeting of His Economic Recovery Advisory Board

The Federal Reserve is no different than most administrative agencies in that its members believe in its cause, defend its track record, and are reluctant to cede any authority. In the aftermath of the 2008 financial crisis, the issue of financial reform emerged, with the Fed at the center of the storm. Ben Bernanke's second term as Fed Chair was approved (despite 30 "no" votes coming from both sides of the political aisle). And members of the Fed have defended the institution of the Federal Reserve System. Fisher emphasized, "A great and powerful economy cannot create the conditions for sustainable noninflationary growth if its central bank is governed by a politicized monetary authority." (Fisher) Similarly, Bernanke argued against drastic changes to the banking system:

We would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting and internal controls of these special credit and liquidity facilities. But it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures. (Irwin)

It is unclear whether this legislation will be altered or approved. But the timing of the legislation is hardly questionable. One analyst observed in 2007, when the economy was still enjoying a period of "Great Moderation," that congressional interest in Fed matters was particularly lax, "no doubt reflect[ing] politicians' satisfaction with the low inflation, rapid economic growth, and greater economic stability that have characterized this period." (McGregor, p 272) The fact that crisis has since brought on the threat of change has plenty of historical precedent. The Fed owes its existence to Congress responding to financial and banking crises in the late 19th and early 20th centuries. It is no accident that its responsibilities were largely formed by legislation in 1914, 1933, and 1935, following some of the greatest economic catastrophes of the last century. Its mandate was last altered in the late 1970s as a response to a lengthy period of stagflation. Its mandate and structure could again be altered as a result of the current financial landscape.

What role the Fed plays and what oversight mechanisms are in place will depend on the political will of those in power. The words of Chris Dodd, regarding a financial regulation bill, suggest that for many in Congress, the will to make dramatic changes to the Fed is limited: "The Federal Reserve should be strong and very, very independent — and I feel very strongly about that second word — to be able to perform its core functions: conducting monetary policy, supervising payment systems, and acting as the lender of last resort." (C-Span, 2009)

While there are clearly members of Congress, like Alan Grayson, who fear the repercussions of allowing the Fed to operate under existing laws, there are those who are equally afraid of putting more of that power into the hands of the government. As George Will observed,

America is committed to democracy — and to circumscribing democracy's scope in order to minimize the damage it can do by improvident responsiveness to gusts of public passion. Thus the government is replete with restraining mechanisms — three branches of government, rival chambers of the legislative branch, vetoes, supermajority requirements, judicial review, etc. And there are extraconstitutional circumscriptions of democracy, such as allowing the Fed an independence that exists at the sufferance of Congress.

Whom can we trust to run the Fed? The answer chosen by the Fed's framers reflected a fear of both banker and political or populist control. Indeed, given these fears, "the only eligible appointees would have been a group of vestal virgins." Lacking a reliable source of such appointees, the framers suggested forming a board on which the destructive forces for and against surprise inflation were re-balanced relative to the general population. (Faust, p 279)

As long as this belief is widely held, the Fed will retain some measure of independence. The government traditionally chooses to cede authority to bureaucracies in order to better enforce laws. If leaders contend that effective law enforcement (or, to some degree, policy decision-making) is better served by bureaucrats than by elected officials, that authority will remain.

But Congress retains the right to solicit information from the Fed and rein it in, just as with any other bureaucracy. Where the Fed is seen to have failed, Congress is more likely to act. Chris Dodd echoed the concerns of many other lawmakers in expressing displeasure about the Fed's role in the foreclosure crisis:

Congress gave the Federal Reserve the authority to protect consumers in mortgage markets in 1994. We've talked about this many, many times in this committee. But for many years, many of us in the Senate were frustrated with our efforts to get the Fed to address predatory lending. The Federal Reserve failed to develop meaningful mortgage guidelines and regulations until the housing bubble burst. (C-Span, 2009)

List of Visuals

1. Charles Hamlin, First Chairman of the Federal Reserve
   http://loc.gov/pictures/resource/hec.04496/
   Library of Congress

2. US Federal Reserve building, July 30, 2009
   Karen Bleier, Getty Images, Taken from Proquest's eLibrary

3. Representative Alan Grayson, a Leading Critic of the Fed
   http://en.wikipedia.org/wiki/Alan_Grayson
   Wikipedia, The Free Encyclopedia

4. Meeting of the Federal Open Market Committee, Washington, D.C.
   http://www.philadelphiafed.org/education/teachers/resources/day-in-life-of-fomc/_images/day-in-the-life-of-the-fomc_img01.jpg
   Meeting of the Federal Open Market Committee

5. Ben Bernanke is sworn is as Federal Reserve Chair, February 1, 2006
   Britt Leckman, Agence France Presse, Taken from Proquest's eLibrary

6. Fed Chairman Alan Greenspan Testifies on Capitol Hill, February 11, 2003
   Stefan Zaklin, Getty Images, Taken from Proquest's eLibrary

7. Obama Attends Meeting of His Economic Recovery Advisory Board
   Photo by Alex Wong/Getty Images, Taken from Proquest's eLibrary


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