One of the hallmarks of the financial regulation reform bills snaking their way through Congress is the empowerment of the Federal Reserve as an overseer of the country’s largest, most important banks. But could giving the Federal Reserve more power actually make it less powerful? This is some interesting conjecture from Harvard economist Jeremy Stein, in an interview with Real Time Economics:
I think it’s quite likely we’ll have a somewhat different model of
central banks a decade from now. I could imagine it would involve
broader powers but somewhat less independence. If you think that the
Federal Reserve has to be involved in cyclical leverage policy, then it
also has to be more deeply involved in supervising the banks. With all
those powers, it may be politically harder to sustain complete
independence from the government.
Interesting thinking. And there’s logic in it, too. After the Federal
Reserve swung open its doors and bailed out the housing and financial
markets with trillions of easy dollars, Congress came to audit Bernanke,
not to praise him. It’s politically repugnant for an independent entity
like the Federal Reserve to be seen wielding too much power (For an
analog, look at the pressure on nominations for the similarly
independent Supreme Court to be deferential to precedent, not-activist,
etc).
It will be interesting to see if financial regulation hold-outs make
something of this when those bills move to the head of the
congressional queue. You could imagine a last minute deal about Fed
powers involving a quid pro quo between a stronger Fed and a more
politically accountable Fed.
Two final points. It should be said that the Federal Reserve — like
the Supreme Court — only draws scrutiny when it draws attention. For
most of the decade, the attention paid to the Fed was a matter of
interest rates moving a quarter percent up and and down. With new
expanded powers, the Fed should be out of the spotlight for the
overwhelming majority of the next decade so long as the banks stay
solvent — ie, the Fed does its job.
Finally, I think that a more politically tethered Fed would be a huge
mistake. It’s not simply that I find Congress’ current incarnation to
be a vestigial shell of a political body. Congress isn’t terribly good
at its own job, which is making law. It’s certainly not going to be
very good at the Fed’s job, which is making monetary policy. The
pernicious implications of our electeds using their political positions
to jockey for midterm numbers is bad enough on the whole of our
economy. For heaven’s sake, Congress, keep your fingers off the money
supply levers.
