The Fed Shouldn’t Be Part of Obama’s New Regulatory Regime

fedI’ve read a lot of opinion on the new financial system regulations and written little about them for the simple reason that I believe the Congress will substantially alter what the Obama team delivered. Much of the punditry is premature in my view. There is, however, one issue upon which many seem in agreement and I think is worth talking about now.

That is the role that the Fed ends up with in the new regime and what the implications for that role might be for its independence. While most of the pieces I’ve read seem generally supportive of the concept of the Fed as the systemic regulator many of those same articles have expressed concern that in becoming the top cop as it were, the Fed would probably find itself subject to more Congressional oversight and dare I say control. If not control then input that it won’t easily be able to ignore.

I’ve expressed the opinion before that if the Fed accepts more power it will be in jeopardy of ceding much independence and after reviewing the Obama plans I am convinced that will be the outcome. While the Fed may truly make subjective judgments in its exercise of monetary policy with regard to the general level of economic activity and prices, it can at least cloak those decisions in objective criteria. In other words, it can hide behind numbers when it decides to either tighten or loosen the purse strings. As a systemic regulator it will not have this advantage as the decisions it will be called upon to take will necessarily be primarily subjective.

As the systemic regulator, the Fed is going to be faced with decisions that by their nature require consultation with the legislative and executive branches. It would be fanciful indeed to think that the Fed might approach these branches with the suggestion that this or that sector of the economy is overheating and measures need to be taken to cool it down only to be rebuffed and that it could then unilaterally alter monetary policy in a manner that would accomplish or seem to be intended to accomplish its original intent. The new role of the Fed would effectively give the Congress and any administration a door into monetary policy.

What puzzles me is why the Fed seems to be so easily accepting of this new role. I can accept the fact that the bureaucracy might simply act like any other and seek more power. I don’t understand why some of the regional bank executives haven’t spoken up. Perhaps they have or perhaps they’re still sorting it out amongst themselves. I do hope that their is a healthy debate going on within those hallowed walls.

I would not be among the first to argue that the Fed has performed well these past few years. I am old enough to remember when it did do its job well and pulled us out of a very bad set of circumstances. Personally, I’d feel a lot more comfortable knowing that there was a truly independent central bank out there that might do the right thing when circumstances called for that. The Fed would do well to opt out of the new regulatory scheme.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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