The President, the Fed, and the Financial Crisis

"Gold bugs" have scorned the Federal Reserve (Fed) virtually since its founding in 1913, fearful than any currency unhinged from gold will undermine sound money and eventually weaken the values that keep society together. Although the banking establishment has traditionally stood as a central symbol for populist mobilization, the gold bugs' opposition to the institution of a central bank was couched in an arcane combination of libertarian political beliefs and nineteenth-century economic theory that never managed to connect with its potential populist constituency (Paul 2012). Through the 1990s and into the new century, moreover, the popular image of the Fed only improved; its policies (more than the actions of the president or Congress) were widely seen as the crucial springs of sustained prosperity, and Fed Chair Alan Greenspan gained the status of a minor celebrity, keeping inflation in check as the Fed continued its generous provision of liquidity to fuel the continuing rise of housing and asset prices (Woodward 2000). The financial crisis that began in 2007 changed all that. The Fed's dramatic interventions to bail out big Wall Street banks, as well as its more incremental expansion of its role in managing the wider economy, have brought not only sharper criticism of specific policies but also renewed attention to the role of the independent central bank in a democratic polity. The upshot is that the Fed's traditional opponents have been joined by more nuanced critics on both the left and the right. Initially, the Fed's aggressive response to the bursting of the housing bubble and the credit crunch, including its extensive involvement in arranging (and guaranteeing) the bailout of the investment bank Bear Stearns, garnered praise and even proposals for expanding the Fed's power to intervene if it deemed that the financial system was in danger (Mauldin 2008). Serving as the front line of defense in a deepening crisis, however, inevitably involved the Fed (with the backing of the Treasury) in a widening gyre of commitments. During a two-week period in September 2008, this included placing the government's main mortgage-guarantee agencies, Fannie Mae and Freddie Mac, into conservatorship; allowing the investment bank Lehman Brothers to fall into bankruptcy; and announcing that it would provide an $85 billion loan to the insurance giant AIG, whose failure the Fed judged would have disastrous effects on the U.S. economy and overseas. It was the bailout of AIG that brought home the fact that the period had witnessed "the biggest expansion of the central bank's power in its 95-year history" (Pittman 2009), and the political winds shifted abruptly. House Speaker Nancy Pelosi asked of Fed Chair Ben Bernanke, "Why does one person have the right to grant $85 billion ... without the scrutiny and transparency the American people deserve?" and House Financial Services Committee Chair Barney Frank, who had been firm in his support, worried that "the Fed and Treasury were intervening in markets without restraint" and urged Bernanke and Treasury Secretary Henry Paulson to request formal legislative authority for the bailout. On the other side of the aisle, Republican Jeb Hensarling attacked the bailouts for "setting a dangerous and unmistakable precedent ... the appearance of a socialist and not a free-market approach to managing our economy" (Andrews, de la Merced, and Walsh 2008; Blackstone and Yoest 2008). The Fed's intervention, unprecedented in scope and targeted to new categories of financial institutions, has also garnered scholarly commentary, stimulating a growing body of research analyzing the Fed's actions and reflecting on the proper role and constraints on the central bank in a democratic polity (Blinder 2010; Goodfriend 2011; Mishkin 2011). These critics hold that the Fed's response to the financial crisis amounts to a significant expansion of its role in the U.S. political economy, an historic shift not only in terms of its monetary instruments but also in terms of its capacity for acting without the consent of democratically accountable authorities. …