Who will win the battle for the soul of the US Federal Reserve? It is shaping up to be a ferocious fight.

http://www.independent.co.uk/news/business/analysis-and-feat...

Who will win the battle for the soul of the US Federal Reserve?

America's 96-year-old central bank is considered too independent by those who want it under tighter government control. Stephen Foley reports

Sunday, 19 July 2009

It is shaping up to be a ferocious fight. Ranged on one side is the entire Republican membership of the US House of Representatives. On the other are many of the most influential economists in the land. In the middle is mild-mannered Ben Bernanke, the chairman of the Federal Reserve. After months of phoney wars and petty skirmishes, this is the big one – the battle for the soul of the Fed.

Leading the charge, in his 19th-century pith helmet, is the unlikely figure of Ron Paul, the libertarian congressman who, for a generation, has been knocking about on the fringes of his party, arguing that it was a terrible error to have created the Fed in the first place, back in 1913. Suddenly, he seems to be surfing a mood among part of the political class. It is time, he says, to bring some political accountability to the over-mighty central bank.

Not so fast, say the massed ranks of economists, marching under the "Fed independence" banner. Politicians meddle in the operations of the central bank at the nation's peril. When the Fed is pumping more money than ever into the fragile credit markets, inflation-wary global investors will punish any hint that its actions could become heavily politicised.

The irony is that both sides are fighting for the same ultimate goal: the suppression of inflation.

Close followers of last year's US presidential election will have noticed Mr Paul, the 73-year-old representative from Texas, during the Republican primaries. His small-government rhetoric, non-interventionist foreign policy and socially liberal views – and his embrace of internet campaigning – won him a large following among the party's young, even though he never garnered enough support to challenge the frontrunners for the nomination.

Mr Paul is a hard-money conservative, who advocates something akin to a return to the gold standard as a means of preventing the government – via the Fed – printing money. Most of the 271 congressmen who have signed up to support his bill to audit the Fed do not agree with that policy; but they are scared, nonetheless, about what the Fed has been able to do over the course of the credit crisis without ever asking for Congress's permission. The bailouts of Bear Stearns, AIG and Bank of America were all cooked up behind closed doors, and public fury has been immense. Meanwhile, the Fed's balance sheet has swelled past $2trn, as it flooded the credit markets with newly printed money, and many congressmen fear the inflationary consequences if that cash is not pulled out quickly