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Giving the Fed more (less?) regulatory power
A few points on the new plan:
1. The Fed is smarter than other regulators, the Fed can pay higher salaries, and the Fed has more independence.
2. Ceteris paribus, the Fed usually can do a better job than other potential regulators. If someone is going to oversee hedge funds and other non-bank financial institutions, why not the Fed?
3. An independent central bank is, all things considered, a good idea for reasons of monetary policy.
4. The Fed, as regulator of financial markets, has an incentive to keep economic growth high and this also militates in favor of the Fed as regulator. A new prudential regulatory agency for capital markets would not be responsible for the overall macroeconomy and would not necessarily have that same pro-growth incentive.
5. A regulator must, one way or another, be accountable to Congress and the President. The more that the Fed is accountable to the other branches of government on regulatory issues, the more it is accountable to them period. That would be true even if monetary policy and regulatory decisions were not converging in practice, as they have been in recent months.
6. In essence we are on the verge of "spending" some of the Fed's monetary policy independence in return for superior regulation. That choice makes me nervous. Indeed, arguably we have already made that "expenditure."
7. The new plan, oddly enough, takes away the Fed's power to oversee banks on a daily basis.
8. One important question is what kind of relationship would develop between the Fed and a new, unified office of prudential regulation. See #7. Even if there is consolidation of all the loose regulatory spokes (should credit unions really get a separate regulator?) into an oversight agency, we should somehow keep the Fed's special access to bank balance sheets. I'm not sure how the Paulson plan fares on that score.
Note also that the Fed is deliberately non-transparent. Is that, when all is said and done, one reason why we are looking to it to enforce more transparency in other institutions?
Posted by Tyler Cowen on April 1, 2008 at 11:45 AM in Economics | Permalink
Comments
The Fed has already regulated privately-issued paper dollars out of existence. And you're asking if the Fed should have MORE regulatory power??
Posted by: Mike Sproul at Apr 1, 2008 11:36:17 AM
Do you believe the two most dominant people in this mess are Bernanke & Paulson?
If yes - who is leading?
What would Paul Volcker be doing?
Posted by: JRip at Apr 1, 2008 12:34:03 PM
Tyler,
Are you advocating recreating the FED as a fully co-equal branch of the the Federal Government?
Posted by: Jacob Tomaw at Apr 1, 2008 12:41:35 PM
I'm not sure why you think the Fed is smarter than other regulators. It's supervision of the banking industry is at best so-so, given that the U.S. gov't ends up with a major bank bailout every ten years or so. It is also completely lackadaisical when it comes to deterring market fraud -- indeed, it often seems to think that deterring market fraud is contrary to its mission of managing systemic risk, since admitting that there is fraud (which happens if you actually prosecute somebody) could be seen as undermining confidence in the market. Better to just sweep it under the rug... Case in point is the widespread mortgage fraud in the subprime crisis (obvious to anyone paying attention) and the skewed due diligence incentives created by the immediate securitization of consumer debt.
Also keep in mind that the SEC's prudential regulation of Bear Stearns worked as advertized -- even had it gone bankrupt, no investor assets were in peril because of SEC capital adequacy requirements. It was the Fed's concern about systemic stability which raises moral hazard concerns (as usual).
Finally, it was the Fed that opposed any oversight at all of hedge funds and private equity firms, notwithstanding evidence that the bulk of commercial paper and corporate leverage was coming from these unregulated entities and not, as traditionally was the case, from regulated banks.
So how are they smarter again?
Posted by: M.D. Fatwa at Apr 1, 2008 1:13:49 PM
Isn't it the job of the SEC to manage hedge funds and other non-depository institutions?
Why not beef them up instead of muddying the Fed's role even more?
Posted by: PJ at Apr 1, 2008 2:17:34 PM
"the Fed can pay higher salaries"
They can, but do they? Check out how much similar positions at SEC or FDIC make compared to the Fed.
Posted by: PA at Apr 1, 2008 3:20:00 PM
I don't know much about the American banking system but I cannot accept point 4 in principle: If the FED really cares that much about growth one should change that! The FED should most of all care about inflation. There are enough other institutions looking after growth (Congress, government, lobbyists).
Posted by: Chris at Apr 1, 2008 3:48:25 PM
I don't know much about the American banking system but I cannot accept point 4 in principle: If the FED really cares that much about growth one should change that! The FED should most of all care about inflation. There are enough other institutions looking after growth (Congress, government, lobbyists).
Posted by: Chris at Apr 1, 2008 3:49:17 PM
Aren't many Federal Reserve officers chosen by banks rather than the federal government? To have banks regulate other related industries (who don't have similar access to Fed positions) creates a huge conflict of interest.
Posted by: stearnsbear at Apr 1, 2008 4:46:50 PM
Isn't this over-complicating things a bit? Aren't the real questions:
1) Who has the knowledge and ability to create more stable financial institutions?
2) How can we have a system whereby those with ability have the incentives to act on this knowledge?
3) What political changes are necissary to empower these people?
I don't know if the Fed has #1 or not, but I fear that it won't have #2. The possibility of regulatory capture seems rather high, doesn't it?
Posted by: Grant at Apr 1, 2008 6:30:46 PM
Basically the Fed is not responsible to anyone. They own the country and debt is good for them, because they own it... the debt that is only payable in US Dollars ( Your tax money, majority of income tax goes to pay interest) Dollars which are issued to the government and banks with... you guessed it INTEREST...
The housing crisis, ARM's are just the most modern incarnation of the Margin Call... the U.S. Public was robbed blind by J.P. Morgan back then, and Bear and Sterns was given the same job by his legacy.
History continues to repeat itself, we are all serfs in this new feudal system. Only now they are smart enough to put out a puppet show called the U.S. Government.
Posted by: TC at Apr 9, 2008 11:16:36 PM
