Fed 'embroiled' in politics, former St. Louis Fed chief says

Section:

By Vincent Del Giudice and Max Raskin
Bloomberg News
Wednesday, July 22, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=apYCNLcqHufI

WASHINGTON -- The Federal Reserve is "embroiled" in politics and has "stretched beyond reason" its authority to make loans, said William Poole, who served as president of the St. Louis Fed from 1998 to 2008.

"I don't think 'independent' can mean the Fed can do whatever it wants under any circumstance," Poole, a senior economic adviser to Palo Alto, California-based Merk Investments LLC, said in an interview today on Bloomberg Radio. "The Fed has chosen to make loans to certain firms and not others."

Traditionally, central banks "deal in government securities" and control "overall liquidity" and "overall interest rates," Poole said. The Fed is "embroiled in fundamentally political questions," he said.

In the aftermath of last year's credit market collapse, the Fed instituted a series of emergency lending programs. Fed policy makers decided at their meeting June 24 to maintain plans to buy as much as $1.75 trillion of Treasuries and housing debt to lower interest rates.

The central bank "has not made loans of this sort since the Great Depression," Poole said. "The Federal Reserve has responded very aggressively to this crisis we are living through" and "has doubled its balance sheet."

The Fed's role in financial market oversight has since come under scrutiny, with the administration of President Barack Obama proposing, among other things, that the Fed’s ability to make emergency loans be subject to approval by the U.S. Treasury.

In Congress, plans for an overhaul in the regulation of Wall Street include a call for the Government Accountability Office, the investigative arm of Congress, to probe the Fed's monetary policy.

"It's important that the Fed be independent on monetary policy, but I worry about what independence might mean in other contexts," Poole said. "The Fed, it seems to me, has stretched beyond reason its authority to make loans to the private sector, such as the MBS (mortgage-backed securities) purchase program, the lending on commercial paper from large corporations, the bailouts."

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