The (Further) Politicization of the Fed

Many people, myself included, worry about the politicization of the U.S. Federal Reserve. To what extent have recent decisions — the bailout of Bear Stearns, introducing new lending facilities, etc. — been driven by markets and economic need, versus being driven, to some extent, by political considerations?

It’s a tough question to answer, but one way of backing in is to understand how much time the Fed’s senior officials spend in private meetings with politician and political appointees. According to ace Fed watchers at the Financial Markets Center, Alan Greenspan met with senior political officials in the 1996-2000 period about twice a week. They deemed that frequency "apolitical". Post 2000, however, Greenspan’s time with political sorts escalated, with him meeting at Treasury and with the President an average of 3.1-times per week.

How has current Fed chief Ben Bernanke fared in maintaining Fed political neutrality during the credit crisis? Well, according to the aforementioned FMC, in his first year in office Bernanke averaged 2.2 political meetings a week, which is in-line with what we saw from Greenspan in his early days. He was, to that way of thinking, being fairly apolitical, at least as evidenced by the amount of time he spent with ear-bending politicians and their appointees.

But that has seemingly changed. According to data I recently received via an FOIA request for Ben Bernanke’s daybook covering the 11/07-03/08 period, he is spending considerably more time with political sorts than he did in his early term. Instead of averaging twice a week, he is now averaging 3.1-times week, a 50% increase, or right up there with amount of pol-time Alan Greenspan did during the period from 2000 forward.

Are these mandarins, or junior no-name senators from East Wherever? No. Bernanke meets weekly, and often twice-weekly, with Treasury Secretary Paulson, even having had dinner with him on a Saturday not long ago. Good for him, of course, because Paulson never invites me over, but it is unusual stuff.

To to clear, I’m not saying Fed chiefs should never meet with politicians. Far from it. It is a useful source of information, and the Fed is, even at arm’s length, a quasi-governmental body. I am saying, however, that a further politicization of the Fed — at least as evidenced by a material increase in the frequency of meetings with key officials — is something worth watching, especially during a time of crisis.