Despite Friday's key report on employment Its time to review what Congress is setting up for the Federal Reserve. Added perspective should come with Thursday's Senate Banking Committee's testimony with Fed Chair Bernanke as he seeks confirmation to a second term to lead the Fed.
With the aim of finding a scapegoat for the financial mess of 2009 both the Senate and House have proposed changes to the Fed's role. As popular thinking brings more to see the government as a watchful public protector the question really is one of increased socialized solutions or changes to the banking system which ends the "too big to fail" mentality and returns our system to a truer form of capitalism.
The Senate's plan would curb the Fed's ability to offer emergency loans and strip away its bank supervision as its gives the Administration some input on the governing of the 12 Fed regional banks. It would create a new (ready?) Financial Institutions Regulatory Administration as the federal bank supervisor and eliminate the timely information the Fed currently collects on bank risks.
The House plan sees the Fed's interest rate decisions reviewed by the Government Accountability Office (an arm of Congress -- surprised?). Republican Ron Paul seeks to end the Fed's independence as some followers credit the Fed as setting the country on a "path of hyperinflation" (CPI has shown annual deflation for the last eight months), "phasing out the dollar as the world's reserve currency" (the Treasury is in charge of dollar intervention) and generally "ruining the country"(well, we are out of recession).
Today's WSJ questions whether the Fed will hold the job as "bubble popper", in essence cooling any risk that markets could recoil after being wound up. That the nature of economics -- cycles that eventually relieve excesses.
Congress wants a system that predicts and prevents crises -- don't we all. The logic runs that the Fed failed in this regard since it didn't prevent the recent financial meltdown. However, who believes that congress can do a better job of supervising banks or setting monetary policy? Congress provides a one way flow. Its very good at giving funds away but can't find the ability to take them back. The $12 trillion public debt makes that perfectly clear as does the debt or deficit outlook over the next decade.
The Fed's relative independence from politics is essential to fight inflation. The introduction of politics to the policy debate would foster a four year cycle timed with elections. The Fed holds a longer term economic interest for the country. Containing large financial conglomerates and banking risks is more feasible than success from the plans now coming from Congress.
Hello Tim!
I don't know when I realized you had left Briefing.com but frankly it was a sad day. They employ a Keynesian now. I am delighted to have stumbled upon your blog, which I will read regularly for some rational analysis. Wishing you much success!
Posted by: Frank Ferrara | December 09, 2009 at 05:47 PM