The Fed seems to be in trouble. President Obama’s proposals for strengthening the Fed’s supervisory power to eventually turn it into the ‘systemic-risk regulator’ are, alas, threatening the Fed rather than enhancing it.
The proposal is, at the least, ill timed. The Fed is particularly vulnerable now. The proposals, by stirring up unnecessary anti-Fed sentiment, could trigger full blown assault against the Fed and undermine its independence.
The oppositions against the proposals are abound and there seems to exist little consensus about the Fed’s expanded role. There are oppositions from agencies that would lose their supervisory authority and power or could be wiped out completely. So many people (not only libertarians and extreme lefties who are more than willing to wage crusade against the ‘supra-legal entity’) are now questioning wisdom of giving more power to the Fed that failed to foresee and prevent the crisis. Lawmakers are getting louder to push through ‘auditing of the Fed’ (but, audit what?).
To be clear, it is not the Fed’s fault that they could not foresee the bubble and the burst. After all, the market could not foresee them, neither. The basic premise of the market economy is that there are few, if any, that can be consistently smarter than the market. If we expect the Fed should be wiser than the market, we should abolish credit market, nationalize all the private banks to integrate them into the Fed, and entrust the Fed to conduct all the allocation of the funds to businesses in the U.S.
The current administration’s rushed proposal, if pushed prematurely, could blow up all the intricate and delicate fabric of arrangements and consensus around the Fed’s independence, whether explicit or implicit, and damage the very idea of the ‘independent central bank’.
There always exist something you should never rush. The reform of the role of the central bank is certainly one of them. Mr Obama should have heeded Volcker’s advice not Summers’s.
(To be very clear, I do not like the contents of the proposal itself, not just the timing of it – the idea of the market where the super-sized regulator governs a few super-sized gambling-banking conglomerates sounds just horrible).
Don’t rush on US systemic risk regulator–Volcker (March 24, Reuters)
Dr Barr Rosenberg on the current crisis
I don’t know if this crisis is ‘a little hardship’, but I tend to agree with what Dr Barr Rosenberg (of AXA Rosenberg) has to say about the crisis…
From The AXA Rosenberg ‘Advantage’ - Issue 12.