Giving the Fed more (less?) regulatory power

by on April 1, 2008 at 11:45 am in Economics | Permalink

A few points on the new plan:

1. The Fed is smarter than other regulators, the Fed can pay higher salaries, and the Fed has more independence.

2. Ceteris paribus, the Fed usually can do a better job than other potential regulators.  If someone is going to oversee hedge funds and other non-bank financial institutions, why not the Fed?

3. An independent central bank is, all things considered, a good idea for reasons of monetary policy.

4. The Fed, as regulator of financial markets, has an incentive to keep economic growth high and this also militates in favor of the Fed as regulator.  A new prudential regulatory agency for capital markets would not be responsible for the overall macroeconomy and would not necessarily have that same pro-growth incentive. 

5. A regulator must, one way or another, be accountable to Congress and the President.  The more that the Fed is accountable to the other branches of government on regulatory issues, the more it is accountable to them period.  That would be true even if monetary policy and regulatory decisions were not converging in practice, as they have been in recent months.

6. In essence we are on the verge of "spending" some of the Fed’s monetary policy independence in return for superior regulation.  That choice makes me nervous.  Indeed, arguably we have already made that "expenditure."

7. The new plan, oddly enough, takes away the Fed’s power to oversee banks on a daily basis.

8. One important question is what kind of relationship would develop between the Fed and a new, unified office of prudential regulation.  See #7.  Even if there is consolidation of all the loose regulatory spokes (should credit unions really get a separate regulator?) into an oversight agency, we should somehow keep the Fed’s special access to bank balance sheets.  I’m not sure how the Paulson plan fares on that score.

Note also that the Fed is deliberately non-transparent.  Is that, when all is said and done, one reason why we are looking to it to enforce more transparency in other institutions?

1 Mike Sproul April 1, 2008 at 11:36 am

The Fed has already regulated privately-issued paper dollars out of existence. And you’re asking if the Fed should have MORE regulatory power??

2 Jacob Tomaw April 1, 2008 at 12:41 pm

Tyler,

Are you advocating recreating the FED as a fully co-equal branch of the the Federal Government?

3 PJ April 1, 2008 at 2:17 pm

Isn’t it the job of the SEC to manage hedge funds and other non-depository institutions?

Why not beef them up instead of muddying the Fed’s role even more?

4 Chris April 1, 2008 at 3:48 pm

I don’t know much about the American banking system but I cannot accept point 4 in principle: If the FED really cares that much about growth one should change that! The FED should most of all care about inflation. There are enough other institutions looking after growth (Congress, government, lobbyists).

5 stearnsbear April 1, 2008 at 4:46 pm

Aren’t many Federal Reserve officers chosen by banks rather than the federal government? To have banks regulate other related industries (who don’t have similar access to Fed positions) creates a huge conflict of interest.

6 TC April 9, 2008 at 11:16 pm

Basically the Fed is not responsible to anyone. They own the country and debt is good for them, because they own it… the debt that is only payable in US Dollars ( Your tax money, majority of income tax goes to pay interest) Dollars which are issued to the government and banks with… you guessed it INTEREST…

The housing crisis, ARM’s are just the most modern incarnation of the Margin Call… the U.S. Public was robbed blind by J.P. Morgan back then, and Bear and Sterns was given the same job by his legacy.

History continues to repeat itself, we are all serfs in this new feudal system. Only now they are smart enough to put out a puppet show called the U.S. Government.

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