Economic Democracy

Posted Aug. 31, 2009, at 6:37 p.m.

President Obama probably had little choice but to nominate Ben Bernanke to another four-year term as head of the Federal Reserve. To change horses as the nation’s economy crosses the still-high floodwaters of the current recession would be to invite a stock market dive and more gloom than gleam in consumers’ eyes. Mr. Bernanke has been lauded as the man who pulled the economy from the edge of the cliff, but also blamed as one who may have been partly responsible for putting it there.

For better or worse, Mr. Bernanke probably will oversee the economy through the rest of President Obama’s first term. The Federal Reserve’s success or failure in that endeavor may determine whether the president gets another term.

In recent decades, the Federal Reserve has become a star player on the policy stage. In fact, its profile has grown since the high-interest days of the Carter administration and the tenure of President Reagan, who appointed Alan Greenspan to the top Fed post. The economy roared through the 1990s in large part because President Clinton heeded Mr. Greenspan’s advice — and therefore got his interest rate blessing — and worked to reduce the deficit.

But the small group of unelected managers who run the bank have too much influence and not enough accountability.

Robert Reich, labor secretary under Mr. Clinton, wrote last year about that disconnect: “You probably learned in school the United States government has three branches. Actually there’s a fourth, in some ways more powerful than the other three. It’s called the Fed, and it pretty much runs the American economy.

“The Fed can expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing [and] its ongoing decisions about interest rates affect us more than anything the other branches do.”

Mr. Reich argued that Americans ought to be better educated on the Fed’s role. In addition to the chairman (Mr. Bernanke), there are six members appointed to 14-year terms, and five regional bank presidents serve with them on the Open Market Committee.

Given the Obama administration’s plan to centralize oversight of banking practices under the Fed, the organization could soon have unprecedented power. The Fed also must begin reeling in the help it has given banks as the economy recovers. How quickly or slowly that is done will have serious consequences.

The Federal Reserve Bank must not be vulnerable to political manipulation by Congress and the president. But it also should be inhibited from being a kingmaker in how and when it gooses the economy into growth mode.

At the same time, elected officials should have more sway in directing the Fed to direct the economy. Merely appointing its chairman and members is not enough. Just as Congress and the White House articulate the goals in Afghanistan, but rely on generals to implement them, economic policy must be more responsive to the democratic impulse.

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