Analysis: Reaction to financial crisis makes for odd bedfellows in Congress

Exclusive analysis for FinReg21 by Darrell Delamaide 

It would be hard to find two lawmakers further apart on the political spectrum than Ron Paul and Bernie Sanders. 

Paul, a former presidential candidate for the Libertarian Party, is a devotee of Friedrich Hayek, the ultra-free-market economist, while Sanders is a self-avowed democratic socialist. Paul is nominally a Republican – he ran a short-lived but popular primary campaign in the 2008 presidential race – while Sanders is an independent who caucuses with the Democrats. 

And yet, the two are united in their desire to put the Federal Reserve under a microscope and find out exactly what actions the nation’s central bank has taken in the financial crisis, and why. It’s one example of how the crisis is producing varied reactions in Congress, sometimes making for odd bedfellows. 

Paul has introduced a bill into the House calling for the Comptroller General of the United States to conduct a thorough audit of the Fed by the end of 2010 and make a detailed report to Congress. Sanders has sponsored companion legislation in the Senate. 

Paul’s bill has won 149 cosponsors, including all but three of his fellow Republicans on the House Financial Services Committee, which will get first crack at the bill, and a score of House Democrats. In the slower-moving Senate, Sanders is still alone with his bill. 

But Barney Frank, chairman of the House committee, has publicly said that the panel will hold hearings in connection with Paul’s bill. Although he is not officially supporting the legislation, he has expressed the hope that Congress will set some limits on the Fed’s emergency lending powers and increase both its accountability and transparency. 

Of course the Fed’s freedom from government oversight and control is intentional, so that it can conduct monetary policy independently. But the dramatic actions taken by the Fed since last spring, doubling its balance sheet by printing new dollars, have led to calls inside and outside of Congress for more transparency on how the Fed sets policy. 

The Federal Reserve is a hybrid public-private sector system. The Federal Reserve Board in Washington is the anchor of the system and looks at broader issues of monetary policy. The 12 regional Federal Reserve Banks execute Fed actions and supervise the banks in their jurisdictions. The Federal Open Market Committee – consisting of the seven board governors, the president of the New York Federal Reserve Bank, and four other regional bank presidents who take turns – actually sets interest rates and other monetary policy. 

Ron Paul has openly campaigned for abolition of the Fed, favoring a return to a monetary system anchored in gold and not prey to the “whims” of a coterie of policymakers. So the current proposed legislation to only audit the Fed is a sign of moderation from him. 

But it’s not only the political fringe in Congress that is concerned with financial reform. Some of the most senior and influential lawmakers on both sides of the aisle have shown an interest in tapping into the public outrage over the financial crisis. 

But their interest is tempered by the generous contributions banks and other financial institutions make to political campaigns. This leads to a certain ambivalence among legislators about taking drastic action. The financial services lobby is big and powerful and has not been shy about throwing its weight around even in the midst of the crisis. 

Sen. Dick Durbin of Illinois, the no. 2 Democrat in the Senate, vented his frustration last month when bankruptcy legislation he sponsored was gutted by removing authority for judges to reduce mortgage principal over the objection of dissenting creditors, a so-called “cramdown.” 

“The banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill,” he told a local radio station in his home state. “And they frankly own the place.” 

Sen. Christopher Dodd of Connecticut, the chairman of the Senate Banking Committee, has been hampered by a sweetheart mortgage deal he had with Countrywide and the revelation that he was the lawmaker who took out language in the bailout bill that would have blocked bonuses like those paid to executives at American International Group. 

Frank has been more active, but has not shown any great zeal for initiating major regulatory reform. He and Dodd would be the point men for any legislative action to strengthen the financial system or reform financial regulation. 

But other lawmakers have taken the lead. Sens. Byron Dorgan of North Dakota, a Democrat, and John McCain of Arizona, the Republican presidential candidate – another combination that is not obvious – proposed creation of a select committee to investigate the financial meltdown. While House Speaker Nancy Pelosi has expressed a preference for working with the current standing committees, a select committee would obviate any turf wars from overlapping committee jurisdiction. 

Dorgan, who is chairman of the Democratic Policy Committee and as such in line to be floor leader at some point, went with Sanders and a group of Democratic luminaries from the Senate – Dianne Feinstein of California, Carl Levin of Michigan, Jim Webb of Virginia, Maria Cantwell of Washington – to a meeting at the White House to complain that the administration was being too soft on Wall Street. 

Hardly a household name, Dorgan has gained some notoriety recently because he was one of eight senators back in1999 who voted against the repeal of the Glass-Steagall Act separating commercial and investment banking. He even predicted that the repeal would lead to expensive taxpayer bailouts within 10 years. 

Sanders expressed his dissatisfaction with the administration line by putting a hold on Gary Gensler’s nomination to become head of the Commodity Futures Trading Commission, objecting that the nominee had been involved in deregulating commodities when he served at Treasury. A second senator has also put a hold on the nomination and chosen to remain anonymous. There is speculation on the Hill that the second hold could be from Cantwell, because of her outspoken opposition to the nomination.

Darrell Delamaide is a veteran financial journalist who has worked for Dow Jones, Bloomberg, Institutional Investor, among others. He is based in Washington, D.C.