What exactly should Congress ask the Federal Reserve do and what should be done by other arms of the government? Its a question Congress is contemplating now as it rewrites the rules of finance in light of the wrenching financial crisis.
Writing in the March 2010 issue of the American Economic Associations Journal of Economic Literature, Alan Blinder — a Princeton economist who was for a time vice chairman of the Federal Reserve Board — says the Fed should monitor and regulate systemic risk because preserving financial stability is (a) closely aligned with the standard objectives of monetary policy and (b) likely to require lender of last resort powers, which the Fed holds uniquely. Siding with Fed Chairman Ben Bernanke, Blinder says the Fed should supervise large financial institutions because they are so integral to systemic risk.
So what should the Fed surrender? We can take away the Feds responsibilities for consumer protection, for supervising small banks and for enforcing the CRA [the Community Reinvestment Act], he says. Such changes, he notes, would reduce the Feds range, influence and headcount a point not lost on the presidents of the regional Fed banks who have been vociferously arguing that holding onto small banks is important.
Blinder argues such changes are wise because making the Fed the overarching guardian of financial stability would make the Fed bigger and more powerful at a time when some people have argued, with some cogency, that the Fed has too much unchecked power already.