|
Defenders of the Federal Reserve's current role and governance misconstrue its legal authority and overstate the risks of proposed reform, critics contend. Some academics and regional Fed presidents themselves say a bill introduced by Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, would ultimately undermine the central bank's ability to fight inflation. In their view, to have regional Fed bank board chairmen subject to Senate confirmation, as the bill would require, would "politicize" monetary policy. Currently, regional chairmen are selected by the Fed's board of governors. "The danger is the new arrangement will politicize the Fed to the point that they don't do what's necessary" when the central bank needs to raise interest rates, former Fed governor Llyle Gramley, now a senior advisor to New York-based Soleil Securities, told Bloomberg on Thursday. Fed supporters also contend that stripping the central bank of its regulatory authority over banks and placing that power in the hands of a new agency, as the Dodd bill would also do, would undermine the Fed's ability to set interest rates by limiting its insight into banks' financial condition. They cite the recent experience of the U.K, where monetary policy is set by the Bank of England but regulatory oversight is performed by the Financial Services Authority, as evidence that splitting those roles doesn't work well. Sorry guys, but the Federal Reserve Act of 1913 clearly placed the Fed under the authority of Congress. If anything, legislators have shirked their oversight responsibilities. That failure was evident in the way Congress let the Fed do more or less what it wanted with regard to banks, only to see a hands-off approach result in a financial crisis nearly as disastrous as that seen during the Great Crash. Listen to what Jane D'Arista, a former Congressional staffer who is now a researcher at the Political Economy Research Institute at the University of Massachusetts, told me not too long ago. "There are those who think the Congress rolled over and played dead in doing its constitutional duty in overseeing the Fed these many years but cynics think that more oversight from Congress would increase Fed coziness with the banks since the Congress itself is so cozy with those institutions," D'Arista wrote in an email. "Ideally, the Congress should ensure Fed independence from the institutions it regulates. But, then, it has ensured its own independence from that quarter." As for politicizing monetary policy, how is it any less "political" for banks to control it, as they arguably do now? Yes, populism poses a risk that the central bank will be too friendly to demands for low interest rates. But how much looser can the Fed be than it has been since the early 1990s? It's not as if Wall Street has favored higher rates anyway. The point is, this argument amounts to keeping monetary policy in Wall Street's hands, and we've seen how well that's worked out. Surely it isn't the way a modern democracy should operate. Again, that's not just me talking. As Axel Leijonhufvud, a professor of monetary theory and policy at Italy's University of Trento and professor emeritus at UCLA, wrote in a paper last year: "When monetary policy comes to involve choices of inflating or deflating, of favoring debtors or creditors, of selectively bailing out some and not others, of allowing banks...to collude, no democratic country can leave these decisions to unelected technicians. The independence doctrine cannot be upheld." Finally, the U.K.'s experience isn't particularly instructive when it comes to the Fed's regulatory role. As Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College in Annandale-on-Hudson, New York, told me in an email Thursday: "My view is that Senator Dodd is on the right track," adding that it should be easy enough for bank regulators to keep the Fed fully informed about the condition of banks, so long as regulators do their jobs. "Let's not forget that the crisis started in the U.S., not in Britain," said the economist. "What the British FSA did not do is to tell the British banks not to buy the U.S.-designed exotic products."
|
in Deal Talk by 
