Under the old system of the British Crown, a well-known maxim was that “The King can do no wrong.” If a bad decision was made, it was the result of poor advisors, since constitutionally the monarch could not act without prior consultation and advice.
Normally, when senior administration officials appear before Congress, they are entreated to answering tough, inquisitive questions about controversial policies for hours on end. But breaking from the Senate’s usual routine of grandstanding on important issues, the Senate Banking Committee has seemingly given the Federal Reserve a free pass.
Today, the old British maxim could be modified to apply to the central bank, since if a bad decision is made Congress has the opportunity to conduct oversight after the fact and to let their objections be heard. But if no objections are raised, how would the Fed know that drastic market interventions were not in the best interests of the free market? Hence, “The Fed can do no wrong.”
The central bank testified recently on their moves to arrange for J.P. Morgan to purchase Bear Sterns at an initial $2 per share.
As Bob Novak notes in his piece, “Wall Street’s Free Pass In Congress,” from April 10th, the most important questions were not asked:
“At last Thursday’s Senate Banking Committee hearing on the government’s historic bailout of Bear Stearns, two questions were expected. Who set the initial bargain-basement price of $2 a share for the investment bank? Who picked J.P. Morgan Chase as the fortunate buyer? Those questions were not clearly asked and were not answered at all.”
Why the lack of curiosity on the part of lawmakers? Apparently, they like Big Bailouts. Novak points out the cozy atmosphere that permeated the hearing:
“The hearing, transferred from the Banking Committee’s cozy quarters to spacious Room G-50 in the Dirksen Senate Office Building, was televised and attracted a packed audience. Details of the government’s extraordinary intervention promised a tense interrogation. But this was not the customary confrontation between lame-duck Republican officials and the congressional Democratic majority. A fraternal mood prevailed on both sides of the table, as if Wall Street had moved to Washington. While conservatives inside the administration are unhappy about the intervention in markets, President Bush seems content with how the Federal Reserve and the Treasury cooked up the deal with erstwhile colleagues on Wall Street. There is little that’s conservative or Republican about the administration’s approach to the fiscal crisis. Uncritical Democratic senators were not even inquisitive.”
Novak again notes the secretive decision-making of the Fed that led to the sale of Bear Sterns, and notes how the Fed’s people who testified were not all that informative about how the deal actually went down:
“Timothy Geithner, president of the New York Fed [who negotiated the deal], … said: ‘Let me just echo what the chairman [Bernanke] and Bob Steel said’ — which was nothing. ‘We did not set or negotiate the price,’ Geithner said later. But who did? Senators did not demand to find out and did not ask how J.P. Morgan was selected.”
This is “oversight” of another order: tacit approval by Congress for a controversial deal which was quite unprecedented. Looks like Bob Novak will have to find out for us the answers to these important questions, since Congress does not want to complete the basic tasks of overseeing the central bank.
If Congress does attempt to not rein in the powers of the Fed, the bank will become self-assured that it can do no wrong, and that it is beyond oversight.
ALG Perspective: At a Congressional hearing which could have illuminated the secretive nature of how the Fed wields its vast powers, the people were instead treated to a whitewash. It is clear that Congress has practically no role in setting priorities in our monetary policy. The least they could have done was find out the details of how a $30 billion deal was struck in the dead of night.
