Deplore as he must the current minor Internet buzz about abolishing the Federal Reserve Board or impeaching its leaders, Fed Chairman Ben Bernanke must have a grudging historical sense that 75 years ago, such chastisement might have been appropriate.
Back in 2002, Bernanke, then a Fed Board member, told a Chicago meeting that the group's honoree, octogenarian economist Milton Friedman, had been correct in blaming the Fed for the Great Depression. "You're right," Bernanke told Friedman and the rest of the audience. "We [the FRB] did it. We're very sorry. But thanks to you [Friedman's analyses and teachings], we won't do it again."
So, if recent Fed policies of blowing monetary bubbles and then bailing out the most reckless Wall Street institutions in fact "do it again," albeit through a different economics, is Bernanke ready for a new round of 1932-style talk about abolishing the Fed or impeaching its leaders?
Perhaps he should be. At least three aspects of Bernanke's Fed chairmanship over the last two years -- the J.P. Morgan Chase-Bear Stearns bail-out, his subservience to Treasury Secretary Henry Paulson, and the Fed's decision in 2006 to stop publishing M3 money supply data that mocked its insistence on "anchored" inflation -- have generated major controversy.
Extra-legal Bernanke Behavior in the March J.P. Morgan Chase - Bear Stearns Bailout: Former Fed chairman Paul Volcker, a recognized pillar of U.S. finance, has opined that the Fed took "actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded principles and practices." Moreover, the statute under which Bernanke purported to act required affirmative votes from five Fed Board members, and Bernanke procured only four. Other critics contend that the bail-out was really on behalf of J.P. Morgan, which could have been pulled down by the impact on its holdings of a Bear failure. In this view, the $29 billion loaned to finance the deal was legally a usurpation of Congressional appropriations power.
Bernanke and the President's Working Group on Financial Markets: Since this outfit, CIA-like in its official but also clandestine nature was set up in 1988, rumor has made it a backstage and unauthorized financial markets participant in crisis periods. The March episode may well be another example. Treasury Secretary Paulson is the Working Group's big capo in Washington, not Bernanke. Indeed, bipartisan leaders of the Senate Finance Committee expressed open concern that Paulson had told Bernanke what to do. Furthermore, although Bernanke testified to Congress that he didn't know about the grave Bear Stearns financial situation until March 13, it turns out, from Freedom of Information Act disclosures, that he may well have known. On March 11, Bernanke and another bail-out architect, New York Fed President Tim Geithner, lunched with representatives of every big Wall Street firm except Bear Stearns. The financial website Monkeybusinessblog.com assumes that Bear people were not on hand because it was their own situation being discussed.
Bernanke, Inflation and the Suppression of M3 Money Supply Data: In November 2005, several weeks after Bernanke was named as chairman, the Fed announced that publication of the broad "M3" money supply data would be discontinued in March 2006 because it was "duplicative." It wasn't, because the M3 measurement is much broader than the other two yardsticks (M1 and M2). More importantly, over the last two years, M3 has ballooned to a 15-16 percent annual growth rate. These no longer official computations mocked Bernanke's pretenses that inflation was low and under control. Indeed, the investment firm of Stifel Nicolaus just published charts showing how closely the 2001-2008 oil price surge has related to the galloping growth in M3. Here, too, the legal question becomes: What did Bernanke know about inflation and the suppression of M3 and what was his personal involvement?
Given that the embattled chairman has the big guns in Washington and a grateful Wall Street on his side, he probably has little to fear. For example, House Financial Services Committee Chairman Barney Frank, a leading pro-bailout Democrat, told the Wall Street Journal that "I don't think that changing the agenda of the Federal Reserve is going to be high on any new president's agenda. I think people think Bernanke is doing well."
People as in "the American people" or people as in big Democratic and Republican donors? One must assume the latter. Right after the Bear gambit, Britain's Financial Times reported that U.S. poll data showed the public opposing bank bail-outs by 4:1 ("U.S. Home-owner Bail-out Hits Resistance," Financial Times, April 2).
Herein lies the warning. Search the Internet for a conjunction of Bernanke or the Federal Reserve with impeachment, you don't get much beyond one or two quirky financiers and the official website of the maverick Republican presidential contender, Congressman Ron Paul of Texas, who favors U.S. withdrawal from Iraq and abolition of the Federal Reserve Board. Paul has no use for either anointed GOP nominee John McCain or the party establishment. However, he does have support from a tenth or so of the Republican electorate. And should Paul signal his followers to back this year's presumed Libertarian presidential nominee, former Georgia Congressman Bob Barr, some pundits think the latter could take 2-3 percent of the November vote, siphoning off enough disgruntled conservatives to beat McCain.
Could the impeachment of Bernanke become a 2008 issue? I doubt it. Congressman Paul, as a member of the House Financial Services, probably knows that back in 1932, Republican Congressman Louis McFadden of Pennsylvania, a longtime Chairman of the House Banking Committee, made a fool of himself with a resolution indicting the Federal Reserve Board for its actions, and then later switched focus to impeachment. The hidden irony is that Bernanke, philosophically, must empathize with frustration with early 1930s monetary policy.
In 2008, however, a more restrained critique could be effective. If Paul and Barr de-emphasize the fringe Libertarian stuff -- marijuana legalization and such like -- and go straight for the jugular of Iraq bungling and its effect on oil prices, along with Federal Reserve misbehavior, they might have a shot at that 2-3 percent. Moreover, even if Barr drew only 1.4 percent, say, on a national basis, he could do better in five swing states -- Ohio, Florida, Colorado, Nevada and New Mexico -- where sensitivity to the housing bubble and mismanaged mortgage crisis runs especially high.
Volcker, the grand old man of U.S. monetary policy, has told audiences that he doesn't believe that incumbent Fed chairman Bernanke will be reappointed by the next president. He certainly won't be if the integrity of his behavior in office becomes a significant 2008 campaign issue.