Bernanke Testifies on Federal Reserve Programs

Ben Bernanke, Federal Reserve Chairman, testified today before the House Financial Services Committee about the Federal Reserve's emergency assistance to the financial markets. Stressing the difficulties to policy makers around the world, Bernanke warned in his opening statement that "[a]lthough the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea." Bernanke also fielded questions on the appropriate role of the Federal Reserve and whether it has too much power. Specifically, the Committee questioned the lack of oversight on transactions entered into by the Federal Reserve.

The question of the appropriate limits on Federal Reserve power is a fair one. How much restrictions should be imposed on the Federal Reserve in its position as a central bank to intervene in a financial crisis? The Federal Reserve might wield power responsibly, but that does not mean the power should be without limit. The lack of accountability and oversight for specific Federal Reserve decisions is a valid point, but it is hard to argue that the Federal Reserve operates with complete autonomy either. Bernanke does get to testify about decisions made (albeit after the fact). Bernanke did stress the efforts that the Federal Reserve is taking to keep Congress and the public involved in its decisions and programs.

Further, the Treasury provided funding for some of the extraordinary measures the Federal Reserve has undertaken. The increase in the balance sheet of the Fed has not occurred without the involvement of the Treasury. As such, the Federal Reserve must act in concert with the Treasury Department in order to accomplish significant new programs. The Federal Reserve's autonomy is certainly large for the new programs it administers, but it still must act within the program limitations. Moreover, other measures, such as announcing interest rates, are expected from the Federal Reserve without congressional intervention in its role as the central bank.

It is easy to see why Congress would be uncomfortable with the Federal Reserve having a great deal of autonomy. But, it is a central bank. On the whole, a certain amount of autonomy appears appropriate for the Federal Reserve in this capacity. Will we eventually arrive at a point where the role is too great? Perhaps.

— JSM