Investor Agenda

How Critical Is the Fed’s Independence?

Ben Bernanke

Ben Bernanke was confirmed last week for a second term as Chairman of the Federal Reserve.

The vote was 70-30 in the Senate, which may seem fairly one-sided, but it’s actually the smallest margin ever for someone nominated to that position, which reflects the growing debate over the role of the Fed.

There are some who blame the Fed for missing warnings signs leading up to the financial crisis; others have said the Fed caused the crisis with its “easy-money” policies.

No matter how you feel about what happened in the past, there is a growing chorus of those who believe that Congress should take on greater oversight of the Fed.

I talked a couple of weeks ago with someone who has an interesting vantage point on this whole question: Stanley Fischer, Governor of the Bank of Israel, that nation’s central bank. He is the equivalent of Ben Bernanke.

It’s an interesting comparison. Fischer has headed up Israel’s central bank for five years, similar to Bernanke’s time as Fed Chairman. The economy there is expected to grow 3.5 percent this year. They survived the global financial crisis with no major bank failures and very few problems. Fischer was the first head of a central bank to raise rates after the crisis, and his term expires in April.

Central Banks are “Dangerous”

Here’s what I found most compelling: Prime Minister Benjamin Netanyahu has informally asked Fischer to stay on another five years, but he would like to do so only if the law is changed so that the government does not oversee the Bank of Israel. That’s how strongly he believes in the central bank’s independence.

“Central banks are very dangerous,” Fischer told me, “because they can print money. Weak governments that can’t raise taxes love going to the central bank and telling them ‘Give us a credit here. Give us a credit there. And then we don’t have to go out and borrow in the markets.’ Then you end up with inflation, and you can end up with hyperinflation.” (You can watch part of my conversation with Fischer here.)

He went on to tell me that he would not jeopardize the economy if policymakers in government made wrong choices and asked him to simply print more money. He wants to make decisions based on economic fundamentals independent of politics. He also said that, while he’s never really been pressured by the Israeli government to make certain decisions, he has received phone calls from officials who disagreed with his moves.

This is almost identical to the debate here in the U.S. leading up to Bernanke’s confirmation. In the end, the Senate felt it better to not “rock the financial markets” (as Sen. Chris Dodd put it) and give Bernanke another term.

Many challenges remain, and I wouldn’t be surprised if the debate intensifies in the coming years. As I’ve mentioned before in , I think one of the great things about our country is that the Fed is independent, that it does not answer to Congress or the President and is as removed from politics as possible. Increasing oversight of the Fed would be a hugely significant shift that should not be undertaken lightly.

For interesting insights on Ben Bernanke, the Fed and central banks around the world, I invite you to watch some of our interviews from the World Economic Forum in Davos. Among those I spoke with wereJean-Claude Trichet, president of the European Central Bank, Axel Weber, president of Deutsche Bundesbank, and Jacob Frenkel, Chairman of JPMorgan Chase International and former governor of the Bank of Israel.

I also highly recommend our conversations with several world leaders, including George Papandreou, Prime Minister of Greece, Jacob Zuma, President of South Africa, and Ólafur Ragnar Grímsson, President of Iceland.



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