The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?
Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt – pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble.
This lack of self-criticism is feeding Congressional hostility toward the Fed. Mr. Bernanke is still likely to win confirmation for a second term, based on his aggressive and creative policies once the crisis began. But Congress hasn’t decided whether to expand his regulatory authority and is considering reining in the Fed’s other main mission ”” setting interest rates.
A once-marginal proposal ”” from Representative Ron Paul, the Texas Republican ”” that would give Congress the power to review interest rate decisions recently passed the House and will soon be considered by the Senate.