American Politics Today - Essentials (3rd Ed)

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ECONOMIC POLICY| 443

ment of assets and liabilities) from $927 billion on September 10, 2008, to an
eye-popping $2.26 trillion by November 11, 2008. About $1.6 trillion of the money
injected into the economy came through eff orts to stabilize short-term lending,
money market funds, and the bailout of AIG (among other things). By October
2012 those loans had been almost entirely repaid as credit markets stabilized.
However, overall Fed assets remained at $2.26 trillion, as the securities held by
the Fed climbed from $514 billion to $2 trillion from February 2009 to September
2010 (including $1.1 trillion in mortgage-backed securities that the Fed purchased
from stressed fi nancial institutions).^19 In the next two years, the Fed continued to
expand its injection of money into the economy by purchasing an additional $600
billion in securities. This unprecedented intervention in the fi nancial sector pre-
vented a serious crisis, but critics argue that the Fed has become too powerful and
unaccountable a player in economic policy making.
One crucial characteristic of the Fed is its political independence: its decisions
are not subject to presidential or congressional review. A strong indication of the
Fed’s independence is that presidents typically reappoint chairs who were ini-
tially appointed by presidents of the other party: Alan Greenspan’s tenure spanned
the presidencies of Reagan, Bush, Clinton, and the second Bush.^20 Ben Bernanke
was nominated by Bush and renominated by Obama. But the Fed is not immune
to political infl uence. In fact, one line of research argues that the Fed tries to help
presidents during re-election years by encouraging a pro-growth economy.^21 Evi-
dence on this point is mixed, but at a minimum, presidents do have the ability to
make it clear when they disagree with the Fed’s policies. Presidents also have the
opportunity to appoint the chair and vice chair of the Fed, but presidents rarely
fi re them because they do not want to upset the fi nancial markets. Other research
has shown that the Fed is at least somewhat sensitive to the preferences of the
president and Congress.^22
The Fed’s ultimate accountability is to Congress, because if things really get
out of hand—for example, if the Fed were to increase interest rates to 20 percent


FEDERAL RESERVE CHAIRMAN BEN
Bernanke (left) presents his
semiannual report to Congress
in February 2010. Although the
Fed makes regular reports to
Congress and the president, it
is an independent agency and
its decisions are not subject to
presidential and congressional
review.
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