Having won the economic battle to keep the Great Recession from becoming something much worse, Ben Bernanke may have lost the political war to preserve the Federal Reserve's current level of independence.
Even if he gets to keep his job as Fed chairman, various reform efforts now could make the central bank more tributary to the Treasury Department or Congress or both. Its independence has waxed and waned over the decades and has usually depended on strong personalities (.pdf) to assert that power. That's why the Fed's future role may depend on Mr. Bernanke's current charm offensive.
Can he win over a skeptical America?
He's swimming against the tide. Americans have long had a populist distrust of concentrating so much economic power in the hands of an unelected group of bankers. That distrust runs so deep that from Andrew Jackson to Woodrow Wilson – a span of 66 years – the United States had no formal centralized banking system. The current downturn has soured its reputation even more, especially its grudging defense of bailouts to huge financial entities.
The number of Americans saying the central bank was doing a good or excellent job has declined – from 53 percent in 2003 to 30 percent now, while those who thought it's performance was poor rose from 5 percent to 22 percent, according to a Gallup poll released Monday. That rating was the worst of nine federal agencies and departments that the survey company asked about.
It's also a bum rap.
The irony is that the Fed is getting high marks for steering the US through its worst economic challenge in decades. There's some debate, of course., but who would have believed in the depths of March that the US is now poised to see weak but positive economic growth for the second half of the year?
Central bankers haven't proved particularly prescient in heading off financial bubbles and have made mistakes that lengthened the Depression and inflated this decade's housing bubble. But the US economy has fared worse when the central bank has not acted forcefully (think 1970s-era stagflation) or been decentralized (think the depression of 1873, which lasted 5-1/2 years).
Do you think Congress, the administration, or (more radical still) an economy without a central bank would do a better job?
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