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Congress and the Fed: Why the Bark is Worse Than the Bite

By a vote of 96-0, the Senate just approved a measure "to require a one-time audit of the Federal Reserve's emergency actions during and after the 2008 financial crisis." This vote reflects the considerable public anger at the Fed's actions -- it's clear that presently the Fed is one of the least popular federal agencies. That's quite a change from Greenspan's "maestro" years.

What some people are forgetting, however, is that this is an intentional feature of the system. The Fed is supposed to do things that politicians cannot do themselves because of the voter outrage it would cause. The idea is that politicians have very short-run horizons. Their goal is to get reelected, and they will generally do whatever it takes to try to ensure that outcome. Thus, policies that are best for the nation in the long-run but have short-run costs that would interfere with reelection will not be implemented by politicians.

But the Fed can do these things -- Federal Reserve Board members have fourteen year, non-renewable appointments to help them to take the long-run rather than the short-run view. And it is expected that when the Fed implements policies directed at the long-run, those who are unhappy with the policy because of the costs it imposes on them or the people they care about will protest loudly.

The best way for a self-interested politician to respond is to say "yep, you're right, the Fed is out of control, it is doing things it shouldn't be doing, things that are harming you, my constituents, and I'm going to do something about it." Or something like that.

But politicians don't really want the power the Fed has, or at least they shouldn't want it. Beyond the issue of voter dissatisfaction and outrage if Congress does what's best from a long-run perspective, I can't imagine Congress designing the kinds of special facilities that the Fed put into place, facilities that made a huge difference in stemming the collapse of the financial system. And even if Congress could design these programs, there's little change they could have put them in place in time to do much good. Congress would have likely deliberated endlessly while the financial sector crashed.

Endless deliberation and the failure of Congress to do the things that were needed while the financial sector crashed even worse than it did would not have gone over well with voters. It's much better for politicians to let the Fed do this, and then the Fed can take the blame if something goes wrong, and, crucially, take the blame in the short-run even when things go right in the long-run. The more responsibility and oversight that Congress has, the more the public's ire will be directed at them.

So politicians should make a lot of noise, and pass measures that convince voters they are coming down hard on the Fed, but that don't really change anything. And this is, in essence, what they did. The measure to audit the Fed is a one-time thing. They are going to take a look at the Fed's emergency actions during and after the 2008 financial crisis, but they will not be subject to continuous audits (though I should add that there is a lot of confusion over the degree to which the Fed is presently audited, most of what it does is already scrutinized by outside observers).

I don't mean to say that everything the Fed did during the crisis was correct, or that ex-post oversight is inappropriate. I think, for example, that the Fed could have done a much better job at making sure that the benefits from the bailout went to the public rather than the people who caused the problems in the first place. The point is simply that much of the anger directed at the Fed is expected, and the mostly bark and little bite response from politicians is expected as well. Politicians want to be able to tell voters how tough they were with the Fed, but they don't really want to have to make those decisions themselves and be placed in the difficult position of having to decide whether to sacrifice their chances of reelection in order to do what's best for the nation.

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