Why the Fed's Power Should Not Be Increased

Somehow, anything written by Edmund L. Andrews these days seems tainted as a result of him telling the world about his Personal Credit Crisis in the New York Times a while back and then hearing subsequent revelations regarding his wife's credit history.

Nevertheless, he does fill in a few very important details on Thursday's Congressional hearing, in which elected officials queried a panel of experts on the possibilities of expanding the regulatory power of the Federal Reserve and opening up the central bank's books.

Two Authorities Advise Congress Against Expanding Its Power
By EDMUND L. ANDREWS

WASHINGTON — Two economists with longstanding ties to the Federal Reserve warned Congress on Thursday that it would be a mistake to make the Fed a super-regulator in charge of reining in “systemic risk” and financial institutions considered “too big to fail.”
In what is shaping up as a political battle over a crucial part of President Obama’s plan to overhaul financial regulation, the economists told a House panel that the Fed had consistently failed to recognize financial catastrophes until they were well under way.

Though Edmund's personal life may be a bit less "ideal" than, perhaps, he was thinking it might be at this point in his life, he does provide a valuable service to the rest of the world by saying things that most financial reporters won't.

Of course, you really can't go wrong just by writing down what Allan Meltzer says...

“I do not know of any single clear example in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures,” said Allan H. Meltzer, professor of political economy at Carnegie Mellon University and the author of a history of the Fed.

In written testimony prepared for the House Financial Services Committee, Mr. Meltzer ticked off a long list of financial crises — the Latin American debt crisis of the 1980s, the savings-and-loan collapse of the early 1990s, the collapse of the dot-com bubble and the recent binge in reckless mortgages — and argued that the Fed had either failed to take preventive action or made things worse.

“We all know that the Federal Reserve did nothing to prevent the current credit crisis,” Mr. Meltzer said. “It has not recognized that its actions promoted moral hazard and encouraged incentives to take risk.”

A broader warning came from John B. Taylor, a top Treasury official under President George W. Bush who was considered a potential candidate to succeed Alan Greenspan as Fed chairman.

Mr. Taylor said that expanding the Fed’s power would dilute its main mission of steering the economy, create conflicts of interest, reduce its credibility and jeopardize its independence.

“The administration proposal would grant to the Fed significant new powers, more powers than it has ever had before,” he told lawmakers. “My experience in government and elsewhere is that institutions work best when they focus on a limited set of understandable goals.”

It is funny that the organization many perceive as being most responsible for the current mess is the one that is likely to have its powers expanded.

There I go again using that word "funny", when, this is not funny at all.

Comments

[fireball:]

there are many historical quotes about the fed (some by its' founders) that are alarming. it is not government. it does not answer to the voters. we are told it answers to govt.. it appears politicians answer to the owners of the fed.
it is comparable to the (legal) sheriff who must answer to his jurisdiction every election and the (questionable) police (policy enforcers) who answer to whoever writes their paycheck. who is likely to become abusive of power?

Jul 12 09:05 AM

[Ferdinand E...:]

Interesting. I was somewhere - maybe Sweden - when Allan Meltzer showed up to straighten the people out. I stayed long enough to get a good look at him, and then split. John B. Taylor's opinions however are quite another matter, if this is the 'Taylor' who wrote a great macro book with Robert Hall. His observations in the above deserves to be noticed.

To hear Meltzer bad mouth the Fed is laughable. He's just got the ___ because he wasn't offered that job.

Jul 12 09:12 AM

[Old Trader:]

I have to agree that it flies in the face of common sense to effectively "reward" any institution/entity that has so demonstrably "missed the boat", time after time.

I'd prefer seeing greater effort put into making certain that existing rules, regulations, enforcement agencies, etc. were doing what they were intended to do, rather than making sweeping wholesale changes. Granted, this may not be as "sexy" as instituting a total revamp of the system, but one "good thing" that has come from the current financial mess, is that weak points have been clearly exposed, with fairly clear cause and effect linkages.

I'm afraid that sweeping reforms/changes, such as expanding the Fed's powers will only come back to bite us in the butt, via the "law of unintended consequences", the next time there's any sort of financial "crisis" (and of course, there will be another one).

Jul 12 01:56 PM