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O. Young Kwon
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O. Young Kwon, NYU Ph.D. in Economics had worked in securities industry for ten years as a Registered Investment Adviser. He taught Macroeconomics and Statistics. Prior to his academic career, he was an Economist/Bank Supervisor at the Bank of Korea (the Fed's counterpart). In 2009 he set up the... More
  • The Fed : A Lonesome Inflation Fighter 0 comments
    Jan 12, 2011 9:46 AM
    Bad decision-making and bad legislation sometime follow any unexpected financial crisis. Any financial crisis is so complex that policymakers are not ready to fight it in the right direction and in a right sequence of employment among available measures. Lawmakers are also reviewing the current laws. They are revising current laws or are enacting new ones to prevent the recurrence of the same crisis in the future.
     
    The monetary policy and bank supervisory power of the Fed should not be blamed as a major cause of the unprecedented financial crisis (2007 to 2009). Therefore, it is not relevant to revise the law to beef up the regulatory power. The causes of the world wide financial turmoil are still controversial. The consensus view dwells on (a) global imbalance of spending and saving, (b) lax regulation for derivatives and hedge funds, (c) the Fed’s low interest policy, and (d) subsidies for home ownership. We still debate over which one is the primary one. At any rate, the Fed policy and supervision cannot be singled out as the major cause of the crisis. In a more deep-rooted sense, the Congress itself is responsible for the related laws to support tax benefits and home mortgages, which contributed fundamentally and steadily to the housing bubbles.
     
    The Fed actually deserves credit for saving the near collapse of the world financial market, which was frozen in 2008. The Fed also has engaged in mitigating the extremely severe downswing of the economy by pumping in liquidity. The Fed haters, however, simply insist that the Fed made this turmoil and bailed out banks with taxpayers’ money. This year (2010) aggressive anti-Fed movements prevailed in the Congress to strip the Fed power without a success. One Congressman even “favors abolishing the Fed.” (Fortune, 2/8/2010, p100). The mid-term election might reinforce the Fed Critic camp. We expect the much tougher blows on the face of the Fed in the coming Congress.
     
    A word about the nature of the financial market in general and the banking industry in particular is in order. This kind of financial services area is far much more delicate, innovation-oriented, and rapidly moving, compared to other industries. As a result, regulating financial services including banking is a very challenging job. Early this year the administration suddenly announced that it would rein in the risky practices of banks. It was the so-called Volker Rule. The misstep of this action is twofold. One is they did not consult with other countries. The other one is whether the Volker Rule is implementable. The commodity which the financial services industry is handling is money. Money affects inflation because money is a medium of exchange. Unfortunately, due mainly to globalization and financial-market innovation, money itself has become very hard to measure and less useful as a forecasting tool. As a consequence, interest rates are driving money supply out into the area of central banking and financial markets.
     
    Inflation affects every nation, every institution, and every individual and company. Inflation pressure is building up slowly at the beginning, but once it has momentum it accelerates all of sudden. At that stage, it is very hard to slow down. Historically the price control has been proved to be ineffective in many countries. We had a bad experience with Nixon. Do not worry about inflation now? Look back the Carter-Regan era. To prevent inflation, we need a loyal guard to watch any symptom of inflation on a full time basis, not by relatively short-term politically appointed policymakers. It's better to stop stoning the Fed. The Fed is just the lonesome inflation fighter for all of us, including you and me. Read Allan H. Meltzer (A History of the Federal Reserve). (December 29, 2010)

     
    Bad decision-making and bad legislation sometime follow any unexpected financial crisis. Any financial crisis is so complex that policymakers are not ready to fight it in the right direction and in a right sequence of employment among available measures. Lawmakers are also reviewing the current laws. They are revising current laws or are enacting new ones to prevent the recurrence of the same crisis in the future.
     
    The monetary policy and bank supervisory power of the Fed should not be blamed as a major cause of the unprecedented financial crisis (2007 to 2009). Therefore, it is not relevant to revise the law to beef up the regulatory power. The causes of the world wide financial turmoil are still controversial. The consensus view dwells on (a) global imbalance of spending and saving, (b) lax regulation for derivatives and hedge funds, (c) the Fed’s low interest policy, and (d) subsidies for home ownership. We still debate over which one is the primary one. At any rate, the Fed policy and supervision cannot be singled out as the major cause of the crisis. In a more deep-rooted sense, the Congress itself is responsible for the related laws to support tax benefits and home mortgages, which contributed fundamentally and steadily to the housing bubbles.
     
    The Fed actually deserves credit for saving the near collapse of the world financial market, which was frozen in 2008. The Fed also has engaged in mitigating the extremely severe downswing of the economy by pumping in liquidity. The Fed haters, however, simply insist that the Fed made this turmoil and bailed out banks with taxpayers’ money. This year (2010) aggressive anti-Fed movements prevailed in the Congress to strip the Fed power without a success. One Congressman even “favors abolishing the Fed.” (Fortune, 2/8/2010, p100). The mid-term election might reinforce the Fed Critic camp. We expect the much tougher blows on the face of the Fed in the coming Congress.
     
    A word about the nature of the financial market in general and the banking industry in particular is in order. This kind of financial services area is far much more delicate, innovation-oriented, and rapidly moving, compared to other industries. As a result, regulating financial services including banking is a very challenging job. Early this year the administration suddenly announced that it would rein in the risky practices of banks. It was the so-called Volker Rule. The misstep of this action is twofold. One is they did not consult with other countries. The other one is whether the Volker Rule is implementable. The commodity which the financial services industry is handling is money. Money affects inflation because money is a medium of exchange. Unfortunately, due mainly to globalization and financial-market innovation, money itself has become very hard to measure and less useful as a forecasting tool. As a consequence, interest rates are driving money supply out into the area of central banking and financial markets.
     
    Inflation affects every nation, every institution, and every individual and company. Inflation pressure is building up slowly at the beginning, but once it has momentum it accelerates all of sudden. At that stage, it is very hard to slow down. Historically the price control has been proved to be ineffective in many countries. We had a bad experience with Nixon. Do not worry about inflation now? Look back the Carter-Regan era. To prevent inflation, we need a loyal guard to watch any symptom of inflation on a full time basis, not by relatively short-term politically appointed policymakers. It's better to stop stoning the Fed. The Fed is just the lonesome inflation fighter for all of us, including you and me. Read Allan H. Meltzer (A History of the Federal Reserve). (December 29, 2010)
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