The July 10 New York Times ran an important story (“Two Authorities on Fed Advise Congress Against Expanding Its Power”) focused on two critics of the proposal. The entire piece warrants reading. But three points are worth highlighting here:
• The Obama administration is proposing to make the Fed responsible for identifying and reining in “systemic risks,” like the explosion of reckless mortgages that nearly destroyed the financial system and started a recession that has yet to hit bottom. The Fed would also be in charge of regulating giant financial institutions that are considered too big to fail, perhaps by imposing higher capital requirements on them.
• “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.
• 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.”
Taylor is a wise economist.
Again, read the full article.
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
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