Fed on Steroids - The American Spectator | USA News and Politics
Fed on Steroids

The Washington Post reports that House Democrats are working on legislation that would “put the Fed, or less likely another government agency, in charge of protecting the stability of the entire system.” The bill is being spearheaded by Barney Frank and is expected to be finalized in the spring.

Last March, Hank Paulson had proposed this idea of using the Fed as a “Market Stability Regulator” that would combat systemic risk, and I panned it in a column.

I wrote:

THE IDEA OF creating a new Federal Reserve Board on steroids, with broad but ill-defined powers to jump in an out of the financial system like a character from The Matrix, is troubling.

Historically, government regulatory agencies are not known for showing restraint, and giving such discretionary power to a body that already operates independently and clandestinely is an added cause for concern.

Even if one assumes the best intentions from members of the Fed, we cannot forget that they are only human. As intelligent and well educated as they may be, they are just as capable of making mistakes as the clever bankers who bet billions on mortgage investments that turned sour.

Whenever there’s a crisis, the solution in Washington is to appoint a grand overseer who will somehow gather all relevant information and marshall resources to prevent another crisis. This thinking was the genesis of the “intellegence czar” position created after the Sept. 11 attacks to “connect the dots” from all the different intellegence agencies. In reality, it just added another layer of bureaucracy while doing nothing to improve intellegence gathering.

The proposed SuperFed is even worse. The Fed’s easy money interest rate policies are as responsible as any other factor for creating the housing bubble. At the time, then-Chairman Alan Greenspan argued that housing prices were more of a local phenomenon, and concluded that a national bubble was “unlikely.” If the Fed couldn’t handle its task of managing monetary policy, then why would anybody expect that it would be able to handle much broader powers?

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