The Associated Press March 2, 2011, 5:05PM ET

Fed chief steps back into into political matters

Before he took charge of the Federal Reserve in 2006, Ben Bernanke vowed to steer clear of political issues. Nowadays he seems to have an opinion on everything.

The latest example came Wednesday, when the Fed chief told Congress that a House Republican plan to cut $61 billion in federal spending this year would cost the economy jobs.

Both sides seized on his remarks: Democrats said there was evidence that the cuts would pose a risk to the economic recovery, while Republicans pointed out that Bernanke's estimate of job losses was much smaller than that of most private economists.

Historically, the Fed has strived to be perceived as politically independent. But at a time of 9 percent unemployment, Bernanke is finding that image hard to maintain. In bad times, economics and politics are always intertwined.

When Bernanke was tapped by President George W. Bush in 2005 to run the Fed, he promised lawmakers at his confirmation hearing: "I will be strictly independent of all political influences."

Fed watchers took it as a welcome change. Bernanke's predecessor, Alan Greenspan, frequently weighed in on politically charged issues during his 18 years at the helm -- from endorsing Bush's tax cuts to how to fix Social Security.

Many economists thought Bernanke, who spent most of his professional life before the Fed post as an economics professor, would be different. He has turned out to be anything but.

In recent months, he waded into the debate over how much debt the government should be allowed to take on, warning Republicans not to use the debt limit as a "bargaining chip" in discussions over how to reduce the federal deficit.

Last year, Bernanke pushed Congress to provide additional stimulus to prop up the economy. They did. Congress and President Barack Obama cut a deal just before the new year for cuts in the payroll tax, leaving Americans with more take-home pay.

And with deficits a hot political topic, Bernanke has pushed Congress and the White House to come up with a credible plan to whittle the nation's $1 trillion-plus budget shortfall over the long haul or risk hurting the economy.

On Wednesday, Bernanke told the House Financial Services Committee that proposed Republican cuts could cost the economy 0.2 percentage points of growth. "That would translate into a couple hundred thousand jobs. So it's not trivial," he said.

Private economists have suggested the damage would be worse. Mark Zandi, chief economist at Moody's Analytics, has estimated the GOP plan would cost the economy 700,000 new jobs by the end of next year. Bernanke says that figure is too high.

It's a critical time for the economic recovery. The latest Fed survey known as the Beige Book, released Wednesday, found the economy expanding throughout the country, but businesses reported they are under pressure to raise prices.

The danger for Bernanke in politicizing the Fed, some economists and academics says, is that it makes it easier for Congress and the White House to pressure the Fed to make decisions that are politically popular but not good for the economy.

"Bernanke should be fighting to maintain the Fed's independence, rather than becoming more political," said Kenneth Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School.

For instance, one fear is that the Fed could come under pressure to hold interest rates at record lows for too long. While low interest rates are attractive to Americans because they make it cheaper to borrow money, they could also feed inflation and lead to speculative buying that would create bubbles in the prices of stocks and other assets.

Critics blame Greenspan for contributing to the housing bubble, which threw the economy into recession when it burst in 2007, by holding rates at low levels for too long after the 2001 recession.

Bernanke is already feeling a backlash. Rep. Mike Pence of Indiana and Sen. Bob Corker of Tennessee, both Republicans, want to narrow the Fed's mission to focusing solely on inflation, rather than both inflation and jobs.

And on Tuesday, Sen. Richard Shelby, R-Ala., questioned Bernanke's motivation in launching a new program at the end of last year to help invigorate the economy by having the Fed buy hundreds of billions of dollars in government bonds.

"Is the purpose to help the administration out of its fiscal problems by monetizing federal debt?" Shelby asked Bernanke.

Allan Meltzer, a professor at Carnegie Mellon University and author of a history of the Fed, said Bernanke is opening the Fed up for interference by speaking out on political matters.

"Bernanke was critical of Alan Greenspan for wading into politics," Meltzer said. "He said when he came to the Fed he wouldn't do it. Evidently, he's had a change of heart."

Meltzer argues that the Fed chief had already compromised the central bank's independence in 2008, when the Fed bailed out insurance giant American International Group and supported JPMorgan Chase's takeover of troubled investment house Bear Stearns.

Meltzer believes the Fed should not have bailed out those firms and that the decision should have been left to the Treasury Department or Congress. The financial overhaul bill passed last year prevents the Fed from bailing out a single company.

Those bailouts angered Americans and haunted Bernanke when Obama tapped him for a second term to run the Fed. In January 2010, the Senate confirmed Bernanke for a second term but by the narrowest margin for any Fed chairman.


BW Mall - Sponsored Links

Buy a link now!