JIM LEHRER: Still to come on the NewsHour tonight: tales of Twitter and Secretary Clinton in Asia.
That follows the second day of questions for Fed Chairman Bernanke. Ray Suarez has that story.
RAY SUAREZ: Those tough questions came today before the Senate Banking Committee. Top of the agenda for senators: the Fed’s authority and its response to the financial crisis.
Chairman Chris Dodd of Connecticut.
SEN. CHRIS DODD, D-Conn.: As we talk about these large institutions, with the powers that already exist within the Fed over bank-holding companies, we get up here and jawbone and ask these institutions to make a difference, but the Fed actually has the authority to make that difference. And there are many asking the question why that authority is not being exercised to convince these institutions that they need to be moving more aggressively when it comes to bank lending.
RAY SUAREZ: Richard Shelby of Alabama, the committee’s ranking Republican, said he disagreed with an administration proposal to give the Fed more regulatory power.
SEN. RICHARD SHELBY, R-Ala.: In the end, it was the failure, I believe, of the Fed to adequately supervise our largest financial institutions that required the deployment of its monetary policy resources to stave off financial disaster. In light of the Fed’s record of failure as a bank regulator, it should come as no surprise that Congress is taking a closer look at the Fed and reconsidering its regulatory mandate.
RAY SUAREZ: Some senators supported Bernanke’s work during the economic crisis. Still, many had questions and criticism.
Democrat Chuck Schumer of New York pressed the chairman on the Fed’s new rules for the credit card industry. A new law signed by the president two months ago sets other new protections for consumers. They kick in early next year.
SEN. CHUCK SCHUMER, D-N.Y.: I don’t think we can afford to wait until our legislation goes into effect. Can the Fed take some actions now, which you have the power to do, to deal with these practices, some of which are clearly predatory?
BEN BERNANKE, Federal Reserve chairman: I agree with you, it’s a problem. But as we discussed earlier, and I got back to you, you know, we just didn’t think we had the authority, given the process involved, to move it up substantially.
RAY SUAREZ: Bernanke told Republican Senator David Vitter of Louisiana he opposes giving Congress the power to audit monetary policy.
BEN BERNANKE: I think that the Congress and the public ought to have comfort and confidence that all the operations that we run, all the lending we’re doing, all those things are done at the highest standard of quality, with appropriate controls, appropriate attention to collateral and to the taxpayers’ interest.
I’m just concerned about what might look like an attempt on Congress’s part to — even if indirectly — try to send a message, if you will, to FOMC to take a different action than it thinks is in the long-run interest of the economy.
SEN. DAVID VITTER, R-La.: Well, again, I think that’s really exaggerated. I think that possible danger would be even further mitigated if these broader audits are regularly scheduled. And it seems to me, in all of that context, regularly scheduled audits are nothing more significant in terms of any danger of interference.
RAY SUAREZ: For his part, Bernanke — whose term as a chairman expires next year, unless he’s reappointed by the president — has taken a more public role in recent months to explain the Fed’s actions.
In March, he sat down with “60 Minutes” for the first television interview with a Fed chairman in 22 years. Yesterday, he published an op-ed in the Wall Street Journal. On Sunday, he’ll sit down with Jim Lehrer and answer questions from a Kansas City audience in an hour-long forum.
For more on the emerging tensions between legislators and the Federal Reserve chairman, we turn to Martin Baily, senior fellow of economic studies at the Brookings Institution. Baily was chairman of the Council of Economic Advisers during the Clinton administration.
And Republican Congressman Scott Garrett of New Jersey, he sits on the House Banking Committee, where Chairman Bernanke testified yesterday, and joins us from Capitol Hill.
And, Representative Garrett, you are the author of a letter to President Obama with a long list of bipartisan cosignatories asking the president not to allow the Fed any more powers until it’s investigated. What would you want a probe to look at?
Probing the Fed
REP. SCOTT GARRETT, R-N.J.: Well, that letter was, as you indicate, a bipartisan letter. Republicans and Democrats got together.
And the issue, of course, arose not so much out of the Financial Services Committee, but was the Oversight Committee here on the Hill that began to investigate some of the alleged, let's say, undue pressure that alleged by the Fed vis-a-vis the banking industry and the Merrill Lynch and Bank of America situation.
And I'm sure you're familiar with all of the investigation that was going on in the House. And we're just suggesting to the White House that, before we take this opaque entity, the Federal Reserve, and give them even more authority, shouldn't we just take a brief moment and shouldn't the administration be interested just to get to the bottom of that inquiry and lay all that out before the public, as well? And then we can go on and have a fuller debate on these other issues, as well.
RAY SUAREZ: Well, you've called the Fed an opaque entity. During his testimony, did the chairman clear up anything that you had questions about?
REP. SCOTT GARRETT: Not really, but I do appreciate the chairman always coming to the committee and laying out his positions on this issue, but so many other ones, as well, more specific to the matters at hand as far as the administration's proposal of giving them broader and greater authorities than they ever have had before, the whole area of the idea of systemic risk and systemic risk regulators, and throwing that onto the Fed, as well, additional authorities in that respect.
He gets into some of it, but, as you can imagine, some of us have real concerns about giving this entity even more authority when there are just so many other questions with regard to their actions in the past, whether it's monetary policy and more recently with them broaching into the topic of fiscal policies, as well.
A lot of us, instead of saying broadening their authority, that we would say we should be beginning to reining in and refocusing their mission once again.
RAY SUAREZ: Martin Baily, is Congress being too hard on the Federal Reserve chairman?
MARTIN BAILY, Brookings Institution: Yes, I think they are. I think he's done a magnificent job in managing this crisis. He really was thrown into what has been a horrendous period, and he's kept the economy afloat, he's kept the financial sector afloat, and I think he should get a lot of credit for it.
Now, did he make some choices or mistakes along the way? Quite probably he did. Did he put some pressure on people? Quite probably he did. But those are things that you have to do in a very difficult situation that he faced.
This notion of auditing monetary policy I think is just a terrible idea. I think markets would react negatively to it. I don't see what we gain out of that. I think we probably would see interest rates rise.
We already have the ability to question Bernanke. He testifies regularly. So I don't see what positive we would get out of that.
Dangers of audits
RAY SUAREZ: Well, you heard the congressman. Do you think you know everything that you would want to know about the nature of the Bank of America takeover of Merrill Lynch, for instance?
MARTIN BAILY: Well, remember what we have in our system is we choose people very carefully. The chairman of the Federal Reserve is chosen by the president, approved by Congress. He has an expert staff. And we delegate to him the authority to run monetary policy, together with the other members of the Board of Governors.
So I think to go in and try to micromanage what he's doing is a bad idea. If we have a general fighting a war, we give him a chance to fight it, and he has to make tough decisions, he has to make decisions very quickly. Bernanke had to make decisions over the weekend.
Now, under the proposed reforms, we are asking that the secretary of treasury give approval if the Federal Reserve is going to expend, put out Treasury money, is going to rescue an institution or to put it back on its feet, so I think that's an appropriate thing to do, and I think the secretary of treasury, working together with the Federal Reserve, can do this quickly.
But I don't think you can necessarily come back to Congress or try to audit what everybody said. That just doesn't work.
RAY SUAREZ: But, Congressman, does your proposal and one from Congressman Ron Paul of Texas threaten the Fed's historic independence from Congress?
REP. SCOTT GARRETT: I don't think so at all. And, actually, quite honestly, I'm really surprised Mr. Baily's comment, as he's so dismissive of the idea that -- I think he said that, yes, probably the Fed did exert some pressure on Merrill Lynch with regard to the BofA situation, and he's not taken aback by that.
If he believes that that went on, he's not surprised, and he's OK with that, I think a lot of the American public and a lot of people in the business community would have concerns about that.
And I can sit here, as well, and say, you know, on the one hand, the president does appoint the head of the Fed with the consent of the Senate. Well, you know, 600,000 people in my congressional district, or at least the people that came out and voted for me, but I don't sit here and say, "Well, you know, constituents, I'm from the government. Just trust me on these things."
And I don't think that anyone from any department or any agency can just simply say, "I'm appointed. I'm selected. So now I just can be able to run any way I want to. I can run roughshod over Wall Street or big businesses or small businesses without some level of accountability."
The American public is simply asking in this bill -- and it's a bipartisan bill. The one you referenced, when you mentioned Ron Paul, he has a bill that I cosigned on with, as well, but that bill has I think like 220 members of Congress, both sides of the aisle on that, all they're asking for is just a little bit of openness to this otherwise nontransparent entity.
There's nothing in his legislation that says that Congress is going to step in and beginning to dictate monetary policy. There's nothing there whatsoever. And I would suggest to you, as well, that in a lot of areas, there is a myth out there with regard to the separateness or the independence of the Fed in some of these areas.
If you look, the chairman of the current Financial Services Committee has on over a half-a-dozen occasions, you know, expressed his opinion very strongly on two areas, on the area of monetary policy and setting rates and saying they should be kept down -- and we saw that the Fed did keep them down -- a lot of economists thought that wrong -- and, secondly, in the area of consumer protection, the area of credit cards, put a lot of pressure on this Fed, particularly, and, lo and behold, this Fed all of a sudden sort of abouted course and said, OK, they're going to enact some regulations in this area.
So there's somewhat of a myth about how independent this and other Feds have been with regard to Congress, but this idea of just asking for an accountability look at this or an audit doesn't change that.
New territory for the Fed?
RAY SUAREZ: Martin Baily, a myth, or are we really in new territory when you hear Congressman Garrett talk about oversight and auditing power over the Fed?
MARTIN BAILY: Well, first of all, I'd like to say that I think Ben Bernanke has a lot of integrity, and I didn't mean to imply that he did anything improper with respect to Bank of America. I don't believe that he did. He has testified about that, and I believe what he said about that incident.
Now, there were mistakes that the Fed made in the period leading up to the crisis. And I think there is an open question as to whether the Fed is the right institution to really monitor the big bank-holding companies. I'm not sure they probably are.
So I don't necessarily disagree with everything the congressman is saying. I think it's appropriate to look at, what are the right powers for the Fed to have and what maybe should go to maybe a consolidated regulatory agency that can work together with the Fed to make sure we don't get into this crisis again?
But I think what we're seeing is sort of an attack on the Fed and the independence of its monetary policy. And we've learned from many countries around the world and the experience in the last 20 years or more than 20 years in the United States that an independent Fed that can set monetary policy, can say what kind of inflation it's willing to live with and how it wants to keep inflation down, that's the best thing for the economy, and it's been proven so in the United States and elsewhere.
RAY SUAREZ: Well, we'll have to leave it there for this session. Martin Baily, Congressman Garrett, gentlemen, thank you both.
REP. SCOTT GARRETT: Thank you very much. Appreciate it.
MARTIN BAILY: Thank you.