Two Fed Presidents have expressed conflicting views of the current activities of the Fed. The difference underscores the fact that there are members of the inner circle that fear the Fed has gone beyond its mandate and in the process jeopardized its independence.

Charles Plosser, President of the Philadelphia Fed, is in the uncomfortable camp. His criticisms include the lack of an exit strategy from the lending programs the Fed has undertaken as well as serious concerns about the role the Fed has assumed. Plosser advocates turning over the lending programs to the Treasury and funding the transfer with a Fed purchase of bonds from the Treasury. Plosser feels that the lending programs bring the Fed too close to participating in fiscal policy, involve picking winners and losers and involve putting taxpayer money at risk. All functions a central bank would traditionally eschew.

On the other side is Eric Rosengren, President of the Boston Fed. He supports the program and reasons that the Japanese experience has shown that simply increasing the money supply doesn’t work. In effect, he is arguing that the Fed in digging deeper into certain sectors of the economy will have more positive benefit than simply focusing on quantitative easing on a macro basis. Rosengren also supports Chairman Bernanke’s contention that the lending positions will work off naturally once the economy and financial system start to recover.

I, personally, am much more sympathetic to Plosser’s positions. I agree with Rosengren that digging deeper into the economy makes sense but that doesn’t negate Plosser’s argument that the Treasury could do it as well as the Fed. The reality is that the Fed is stuck. Congress and the administration have no appetite to take on any more debt that they have to justify to the American public. Doing it in a stealth manner suits their purposes just fine. Moreover, Bernanke is not about to start a fight over these issues at this juncture.

It’s an ugly status quo that we’re stuck with.

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