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A House committee looks at weakening the Federal Reserve. That wouldn't be good for the central bank or the economy
Published on Friday, Nov 27, 2009
The House Financial Services Committee, as part of its effort to overhaul financial regulation, has approved a Paul-inspired provision that would allow Congress to order audits of all the Fed's lending programs, plus its decisions to set monetary policy by raising or lowering interest rates. The Government Accountability Office would conduct the assessments. Paul touts the value of bringing greater transparency to Fed operations.
What's so troubling?
A cornerstone of the Fed since its creation a century ago has been its independence. Expose the bank to political pressure, and its credibility would be threatened. Investors would be uncertain about its capacity for tough decisions such as raising interest rates to combat inflation. Analysts warn that even hints about higher interest rates would trigger requests from lawmakers seeking political leverage.
Recall the important decision-making of Paul Volcker, late in the Jimmy Carter years and into the presidency of Ronald Reagan. As the Fed chairman, Volcker understood the pain that would result from wringing double-digit inflation out of the economy. His independence helped immeasurably in allowing him to do what was right for the country.
Much of the fury now directed at the Fed stems from the failure of Alan Greenspan, a former chairman, and Ben Bernanke, the current chairman, to see the looming financial crackup. They were not alone. Choices by Congress and the White House, Democrats and Republicans, aided the mess. (That said, Bernanke deserves high marks for responding aggressively and effectively when he did act.)
So, yes, a revamping of financial regulations is required, updating systems to match the sophistication of new investment tools. The Financial Services Committee has put forward promising proposals, including an agency dedicated to consumer financial protection. It also has much still to accomplish, the House looking to vote on a complete bill next month. Most notably, the legislation must prove aggressive enough in regulating derivatives, the vehicles for speculation, the prime culprits in the collapse.
Paul Volcker persuasively argues for a new version of the Glass-Steagall Act, approved in 1933 and revoked in 1999, restoring the separation between commercial and investment banking. That would be a fitting response to the populist anger. Undermining the independence of the Federal Reserve is not.
Get the full article here.
Comments
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Memory Alpha, OH
Posted 08:58 AM, 11/27/2009
How is knowing what the Fed is doing with our money taking away their independence?
Oh, because they may being doing some things that are questionable, even damaging?
akron, oh
Posted 10:58 PM, 11/28/2009
@nmaxxs, That would be applicable to the City of Akron also. No transparency for Akron because they may be doing somethings that are questionable, even damaging!
