The Fed and the politicisation of credit

Having made some comments on the problem of the politicisation of provision when the government is involved earlier, I was interested to come across this article from the New York Times, Lender’s Role for Fed Makes Some Uneasy by Edmund L. Andrews.

Andrews opens his article by noting,

For most of its history, the Federal Reserve has been a high temple of monetary matters, guiding the economy by setting interest rates but remaining aloof from the messy details of day-to-day business.

But the financial crisis has drastically changed the role of the Fed, forcing officials to get their fingernails a bit dirty.

Andrews continues

Since March, when the Fed stepped in to fill the lending vacuum left by banks and Wall Street firms, officials have been dragged into murky battles over the creditworthiness of narrow-bore industries like motor homes, rental cars, snowmobiles, recreational boats and farm equipment — far removed from the central bank’s expertise.

A growing number of economists worry that the Fed’s new role poses risks to taxpayers and to the Fed itself. If the Fed cannot extract itself quickly, they warn, the crucial task of allocating credit will become more political and less subject to rigorous economic analysis.

By this may not be the biggest problem for the Fed. This hands on involvement could undermine the Fed’s political independence and credibility as an institution that operates above the fray.

Executives and lobbyists now flock to the Fed, providing elaborate presentations on why their niche industry should be eligible for Fed financing or easier lending terms.

Hertz, the rental car company, enlisted Stuart E. Eizenstat, a top economic policy official under Presidents Bill Clinton and Jimmy Carter, to plead with both Fed and Treasury officials to relax the terms on refinancing rental car fleets.

Lawmakers from Indiana, home to dozens of recreational-vehicle manufacturers like Gulfstream and Jayco, have been pushing for similar help for the makers of campers, trailers and mobile homes.

And when recreational boat dealers and vacation time-share promoters complained that they had been shut out of the credit markets, Senator Mel Martinez, a Republican from Florida, weighed in on their behalf with the Treasury secretary, Timothy F. Geithner, who promised he would take up the matter with the Fed.

Andrews notes,

The central bank is increasingly having to make politically sensitive choices. For example, it is weighing whether loans to people who buy speedboats and snowmobiles are as worthy of help as those to people who buy cars. And it is being besieged by arguments from R.V. manufacturers and strip-mall developers that they play a crucial role in the economy and also deserve help.

And the lobbying of the Fed, and the Treasury, by industry groups and politicians has increased.

But the Recreational Vehicle Industry Association and Indiana lawmakers — among them, Representative Joseph Donnelly, a Democrat, and Representative Marc Souder, a Republican — were already lobbying the Fed to include loans for recreational vehicles on its list of eligible collateral that the Fed would accept.

They were not alone. Rental car companies were pushing the Fed to finance their fleets. Hertz, which is owned by two private equity firms — the Carlyle Group and Clayton, Dubilier & Rice — hired Mr. Eizenstat to make its case.

In trying to persuade the Fed to relax its loan terms, Mr. Eizenstat led delegations of Hertz officials to both the Treasury and the Fed. They reached out to Ron Bloom, the co-chairman of the Treasury Department’s auto task force, as well as to top aides to Mr. Geithner. They also made detailed financial presentations to Fed officials in Washington and New York.

The Andrew's article also says that

Fed officials say they, too, are uncomfortable with their new role and hope to end it as soon as credit markets return to normal.

But may it not be that the Feds very involvement is one of the things preventing, or at least slowing down, that return to normal?

The task of allocating credit can only become more political and less subject to rigorous economic analysis within this type of framework. When politics rather than economics allocate credit the results are predictable, a misallocation of credit will occur. Businesses that shouldn't get credit, on economic grounds, will obtain it simply because they are better at playing the political game. Those with less lobbying skills, but perhaps better business ideas, will miss out. And ultimately the standard of living of ordinary Americas will suffer because of it.