Congress, the Administration, and the Fed: Ships Passing in the NIght

The soundbite du jour on Capitol Hill is outrage over the Federal Reserve Board. The Fed, according to outspoken members of Congress, encouraged profligacy with low interest rates, missed the boat on the financial crisis, failed to protect retail borrowers, coddled and protected Wall Street firms, and now wants even more power, as proposed by the Obama administration. The Fed, particularly Chairman Ben Bernanke, is trying to reach out to the legislature and make nice. However, there is scant indication that it admits a whole lot of error, or that it would settle for less than the administration's proposal to increase its jurisdiction and power.

Meanwhile, in the next ring of this circus, Congressional criticism of Treasury Secretary Timothy Geithner is increasing in volume and stridency. Some have called for his resignation. Geithner, who doesn't have the professorial detachment that may be Bernanke's best PR weapon, forgot to smile.

In the third ring of the federal circus, swing votes in Congress dig in their heels in opposition to a public health plan for the uninsured, even as a majority of the public supports one. The administration seems to be ducking for cover behind both sides of this fence.

The level of federal dysfunction has risen along with the Dow. When the markets were plunging a year ago, there was near unanimity in Washington. The one time Congress got fussy, initially voting down TARP, stocks nosedived. An overnight plunge in 401(k) accounts concentrated legislators' minds wonderfully, forcing Congress to get right with its constituents. TARP lived.

Now that investors are feeling a little better about their portfolios, Congress is feeling its oats again and becoming, well, democratic. Cacophony is in the nature of democracies, and Washington is very natural these days. Wall Street compensation is leaping and bounding again, as is unemployment on Main Street. So there's lots of grist for the condemnation mill.

One hundred schools of populism have bloomed and now contend. We have tea parties, Sarah Palin book parties, increasingly unpredictable independent voters, Lou Dobbs resigning from CNN with an indication that he might enter politics (Sarah, watch your right flank--this guy is your real competition), and more. Militia movements awaken from hibernation. Guns and ammo sales boom amidst rising prices (the firearms industry loves Democratic presidents). The bi-coastal elites that control the Democratic Party misunderstand just about all of this. The guns and ammo sales, and reawakened militias, aren't an indication of increasingly violent tendencies so much as an expression of uncertainty and fear, a way to feel like you're protecting yourself because you don't think you can count on the government. Tea parties, Palin, Dobbs, Glenn Beck and the like find support because citizens feel that no one in Washington speaks for them.

The federal government's ability to function could be critical to economic recovery. The economy last year stepped back from the abyss because of massive governmental intervention. Even today, the economy and stock market are all government, all the time. As long as the Fed promises to keep interest rates at zero, the dollar remains weak and the stock market moves up (a somewhat dysfunctional correlation since a weak dollar will ultimately undermine America's way to borrow its way out of recession). But if the Fed's policy were to change, the market and perhaps the economy would do a 180 muy pronto.

The next 11 months, leading up to the fall 2010 elections, will be a crucial test for the federal government. Health care reform is essential. Federal financial regulation must be altered to prevent, well, a helluva lot of things. No more too big to fail banks. No more runaway, unregulated derivatives markets. No more stupid mortgage loans to people who have no demonstrated ability to pay. No more easing back on bank capital requirements as assets are bubbling and leverage is booming.

People in Washington are talking past each other; indeed, sailing past in the dead of night. And that's just the Democrats. The Republicans don't even look at the Democrats when they speak, but instead the TV cameras and their potential campaign donors. We know at this point that there won't be any bipartisan marshmellow roasts where Kumbaya tops the charts. But we have an economy and financial system that are all government, all the time. If the government doesn't function, at least minimally, the economic recovery, ever so fragile, will become evanescent.