The financial-overhaul plan before Congress leaves the Federal Reserve in the business of lending to everyone from General Electric Co. to investors in student loans. That makes it harder for Chairman Ben S. Bernanke to keep Congress from second-guessing what he does.
Bernanke is trying to deflect a bill, co-sponsored by 276 members of the House of Representatives, that would require audits of central bank operations, including monetary policy decisions, by the Government Accountability Office. Audits wouldn’t be “consistent with independence,” Bernanke said at a Kansas City town hall meeting July 26. “I don’t think the American people want Congress running monetary policy.”
Unless the Fed retreats from unlimited lending, Bernanke can expect such a result, said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh. The more the Fed invades the domain of Congress by supplying credit to businesses and markets outside the banking system, the more Congress will seek a hand in monetary policy, said Goodfriend, a former adviser to the Richmond Fed.
“Central bank independence is incompatible over time with all but limited, temporary last-resort lending” to banks, Goodfriend said in an interview. The Fed’s role in emergency lending “needs to be clarified before the next crisis,” he said.
