WASHINGTON -- The Federal Reserve will be forced to disclose next week to whom it made emergency loans, and for what amount, during the financial crisis, a disclosure that is likely to reignite public anger at the central bank. For the past few weeks, the GOP has been preparing to exploit that discontent to press forward a longstanding political objective. Republicans have long opposed the Fed's "dual mandate," which requires that it focus equally on price stability and achieving full employment. Instead, say GOP leaders, the Fed should focus primarily on combating inflation or deflation.
As a result, longtime progressive critics of the Federal Reserve have found themselves in the uncomfortable position of defending the highly unpopular institution, arguing that while the specific measures the Fed is taking to reduce unemployment may be flawed, the idea that the bank should make an effort is sound.
Sen. Bob Corker (R-Tenn.), a top Republican on the Banking Committee, specifically called last week for the Fed to get out of the jobs business. "I think he's on to something," Sen. Richard Shelby (R-Ala.), the highest ranking Republican on the banking panel, told HuffPost. "Historically, the Fed did focus on price stability. The Humphey-Hawkins act was added much later."
"The Fed has got its hands full to say the least and I believe they've got to focus on price stability," Shelby said. Pressed as to whether the unemployment mandate should be explicitly stripped, he said: "I think that the most important thing is price stability."
Sen. Richard Burr (R-N.C.) told HuffPost he agreed. "I think the Fed should be focused on monetary policy and clearly monetary policy has an impact on unemployment, but I don't think that should be a driving issue in their decision-making," he said.
Rep. Alan Grayson (D-Fla.), an author of a Fed audit provision that the central bank fought tirelessly, ripped the Republican effort to strip its authority to address unemployment. "It doesn't surprise me," he told HuffPost. "I think that [Republicans] believe that the fundamental problem in this country is that poor people have too much money. So, given that that's their belief, it doesn't surprise me that they would not mind at all if we had higher unemployment."
Rep. Jerry Nadler (D-N.Y.) said that Democrats should be hammering Republicans for trying to block the Fed from reducing unemployment. "Talk about political incompetence. Why aren't we blasting them, saying, 'See, they don't give a shit about jobs. They're saying we shouldn't be concerned with employment, only inflation.' The whole issue in this election was employment," said Nadler. "When people are angry at Wall Street, and rightfully so, and they vote Republican, that's a failure of communication."
Sanders, Grayson and Nadler find themselves in the unusual situation of siding with Treasury Secretary Tim Geithner. Bloomberg's Al Hunt asked Geithner last week about the GOP push to strip the Fed of its job-creating role. "Congress did a very thoughtful job, very careful job of setting up this independent central bank with that dual mandate. That has served the country very well over time," Geithner said. "We are going to make sure that -- of course, the Fed is going to make sure it preserves that, and I would not, again, create expectations that we are going to alter the basic mandate."
Republicans have also attacked the Fed's recent announcement that it would purchase $600 billion worth of longterm debt. Fed Chairman Ben Bernanke reasoned that inflation was low enough that the intervention could possibly reduce unemployment without destabilizing prices. Progressives have also been critical of the Fed intervention, but take a different tack: It's not that the Fed is doing too much about unemployment, but rather that it's not doing enough and focused too strictly on Wall Street.
"I understand that there will be some Republicans who will want to limit the scope of what the Fed can do and I don't agree. I think especially in the midst of the very severe recession we're in right now we need all of the tools possible in order to deal with the economic crisis and lower the very high unemployment rates," said Bernie Sanders (I-Vt.), who led the effort in the Senate to foist transparency on the Fed. "So we can argue about the merits of the program, whether it's too much or not enough, but one of the mandates of the Fed right now, it's not only to protect the safety and soundness of financial institutions, it's also to bring us to full employment."
On December 1st, the Fed as a result of the Fed audit provision, will be required to post reams of detail about whom it lent hundreds of billions of dollars to during the financial crisis. Progressives should be ready for Republicans to use the outrage generated by the disclosures to bend the Fed in a more pro-bank direction, said Sanders.
"As often, the right wing will try to jump on this thing and try to minimize the power of government to address serious problems. We will oppose that vigorously. We believe that the Fed does have an important role, along with the Treasury, etcetera, to do everything they can to promote full employment," said Sanders.
While the GOP and Wall Street is ready with its line of attack on the Fed -- that it is too busy dealing with this and that to worry about unemployment -- progressives haven't settled on a set of proactive reforms, but Sanders said that a good start would be to prevent bank executives from occupying key positions within the central bank.
"When you have the dominant members of the Fed come from the largest financial institutions in this country, I think you've got a serious problem. The function of the Fed is the function of the United States government: protect the interests of ordinary people and it is to my mind not necessarily true that what is in the best interests of the largest financial institutions that dominate the Fed, I don't necessarily believe that that is in the best interests of working families."
Sanders said that 35 banks that are represented on the Fed's board of directors received $120 billion from the bailout. The Fed has provided more than $2 trillion in exceedingly cheap loans; more than 60 banks are represented on the central and regional banks. Data released December first will shed light on whether banks whose executives hold Fed positions benefited from Fed largesse.
Bill Kristol and a host of conservative activists weighed in on the Fed debate last week, pressuring Bernanke to retract the longterm purchase program he recently launched.
Rep. Barney Frank (D-Mass.), the outgoing chair of the House Financial Services Committee, lashed out at the GOP and defended the Fed on Bloomberg TV Monday. "The Republicans are arguing that the Fed should not even be concerned about unemployment. They are very explicit about this. The Fed has, under the Humphrey Hawkins bill, the dual mandate to worry that inflation and to promote employment and they are explicitly saying to ignore employment, worry only about inflation and since there is no inflation now, do nothing," said Frank, noting that the Republicans were siding with China's central bank in making their case. "If it was Democrats siding and meeting with foreign critics of America's right to act in its own enlightened self interest, the top right-wing radio would be shattering the atmosphere. And that is what they are doing. They are telling Ben Bernanke, they agree with the foreign central banks; 'America, you cannot defend your own economic interest.'"
Frank's defense of the Fed echoes a challenge laid down by New York Times columnist Paul Krugman on Friday.
"So what's really motivating the GOP attack on the Fed?" Krugman wrote. "Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Bernanke that 'with Republican policymakers seeing economic hardship as the path to election glory,' they would be 'opposed to any actions taken by the Federal Reserve that would make the economy better.' In short, their real fear is not that Fed actions will be harmful, it is that they might succeed."
The GOP's leading critic of the Fed, meanwhile, dismissed the his party's most recent approach to Fed reform. "It's so irrelevant. It's missing the whole point of what the Fed is supposed to be doing," Ron Paul told HuffPost of the business wing's effort to eliminate the full employment mandate. "The Fed creates the unemployment through the business cycle. You can't possibly do that. I mean, they're the ones who create the bubble. They're the ones who cause the corrections and the recessions, and that's where the unemployment comes from. To say that they can have price stability and not deal with unemployment -- what needs to be pointed out is, it's because of Fed policy that you have unemployment. It's not because the Fed knows what to do about it."