A ray of fiscal sunshine

Fed Chairman Bernanke’s proposed compromise on transparency should be soaked up.

Testifying before a House Committee on Wednesday, Federal Reserve Chairman Ben Bernanke offered a compromise to quell Congressional critics of the extraordinary secrecy surrounding the FedâÄôs intervention in financial markets. Included is support for disclosure of recipients of these special programs and opening up the FedâÄôs operations and controls to limited Congressional audit and oversight. Daily monetary policy âÄî interest rate setting and bank reserve requirements âÄî would be exempt from such scrutiny. Chairman Bernanke deserves credit for this stance. Congressional leaders should take his offer of compromise as a starting point for reform legislation. Disclosure of certain actions after a reasonable amount of time âÄî closer to two months than two years âÄî would permit performance evaluation without endangering market operations. Monetary policy itself should remain largely insulated from politics. Currently, Congress sets goals âÄî maximum output and stable prices âÄî but does not directly interfere. A review of economic history offers far more failures of political intervention in monetary policy than successes. A highly indebted government with direct control over money supply can inflate its way to solvency, at the expense of banksâÄô balance sheets. In the 1930s, political control of money supply in the German Weimar Republic famously led to hyperinflation so severe that a loaf of bread ultimately required a wheelbarrow of bills to purchase. More recently, Zimbabwe has experienced similar politically motivated monetary distress. Conversely, a government in the thrall of creditors can restrict the money supply, increasing the value of a dollar and making debts more difficult to pay off. Blinded critics will say that the Fed is both dangerously expanding the monetary supply and in the pocket of banking interests. On the former, evidence thus far suggests otherwise. Prices have remained stable. Banks have, however, apparently gotten preferential treatment thanks to the slew of programs started in the midst of the financial crisis. It is here that the value of the ChairmanâÄôs compromise is most clear. Opening up these programs to public scrutiny will allow post-game evaluation of the FedâÄôs extraordinary actions, perhaps demonstrating the need for additional reform. Real-time disclosure, as Bernanke fears, might cause undue panic, since short-term loans are not as indicative of a fundamentally weak bank as a cash management strategy. The ball is now squarely in CongressâÄôs court. Lawmakers should grab hold of the offerings before Bernanke fades back into a shroud of secrecy and fading political outrage. Kyle Weimann welcomes comments at [email protected]