Bernanke gets politics lessons

NYT has a superb article on how Bernanke is getting political lessons. Ron Paul, Texas Republican wants to audit the Fed and take control of Fed. Bernanke has been opposing the move in his speeches/testimonies (see this previous post for the debate).

So the article explains how furious the politicians are and are asking Bernanke to explain the Fed moves in this crisis. How do they explain to the public that Fed gace USD 2 trillion to banks that led to the crisis at the first place. All these are politicians issues and Bernanke needs to explain and is finding it difficult. Reminds you of the excellent Blinder piece on the same.

However, this bit doesn’t sound good:

Voters had become suspicious and unnerved by the Fed because of its trillion-dollar efforts to bail out the financial system, Mr. Frank warned. If the Fed really wanted to survive the disgruntlement in both parties, he continued, Mr. Bernanke would have to step back and let him devise a compromise.

Reluctantly, the Fed chairman agreed to reduce his own visibility on the issue and let Mr. Frank take the lead.

It was just one example of how the Fed has been forced to scramble as its power comes under more fire than at any time in decades.

On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail.

Read on the article for more details. Lots of senators asking questions on Fed and its role in the crisis.

Now we all take central bank independence as given and understand its role. But how do you explain that too a politician? The moment he learns that the central bank has been created by the government he is going to be all the more perplexed by the independence issue. I mean Treasury/Finance Ministry guys would understand but there are all kinds of other ministries as well. A central bank has mighty powers as well which makes the issue worse.

Bernanke is taking these lessons and I am sure doing well. The other central bankers could join in as well. Knowing monetary economics is surely the most important task, but knowing the political landscape is as important.