Wikinvest Wire

Opposition to increased power at the Fed

Friday, July 10, 2009

Somehow, anything written by Edmund L. Andrews these days seems tainted as a result of him telling the world about his Personal Credit Crisis in the New York Times a while back and then hearing subsequent revelations regarding his wife's credit history.

Nevertheless, he does fill in a few very important details on yesterday's Congressional hearing, in which elected officials queried a panel of experts on the possibilities of expanding the regulatory power of the Federal Reserve and opening up the central bank's books.

Two Authorities Advise Congress Against Expanding Its Power

WASHINGTON — Two economists with longstanding ties to the Federal Reserve warned Congress on Thursday that it would be a mistake to make the Fed a super-regulator in charge of reining in “systemic risk” and financial institutions considered “too big to fail.”
IMAGE In what is shaping up as a political battle over a crucial part of President Obama’s plan to overhaul financial regulation, the economists told a House panel that the Fed had consistently failed to recognize financial catastrophes until they were well under way.
Though Edmund's personal life may be a bit less "ideal" than, perhaps, he was thinking it might be at this point in his life, he does provide a valuable service to the rest of the world by saying things that most financial reporters won't.

Of course, you really can't go wrong just by writing down what Allan Meltzer says...
“I do not know of any single clear example in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures,” said Allan H. Meltzer, professor of political economy at Carnegie Mellon University and the author of a history of the Fed.

In written testimony prepared for the House Financial Services Committee, Mr. Meltzer ticked off a long list of financial crises — the Latin American debt crisis of the 1980s, the savings-and-loan collapse of the early 1990s, the collapse of the dot-com bubble and the recent binge in reckless mortgages — and argued that the Fed had either failed to take preventive action or made things worse.

“We all know that the Federal Reserve did nothing to prevent the current credit crisis,” Mr. Meltzer said. “It has not recognized that its actions promoted moral hazard and encouraged incentives to take risk.”

A broader warning came from John B. Taylor, a top Treasury official under President George W. Bush who was considered a potential candidate to succeed Alan Greenspan as Fed chairman.

Mr. Taylor said that expanding the Fed’s power would dilute its main mission of steering the economy, create conflicts of interest, reduce its credibility and jeopardize its independence.

“The administration proposal would grant to the Fed significant new powers, more powers than it has ever had before,” he told lawmakers. “My experience in government and elsewhere is that institutions work best when they focus on a limited set of understandable goals.”
It is funny that the organization many perceive as being most responsible for the current mess is the one that is likely to have its powers expanded.

There I go again using that word "funny", when, this is not funny at all.

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AJ said...

Encouraged incentives to take this anything like the Greenspan Put? i.e. Greenspan would do everything in his power to make sure the stock market didn't crash, including dropping interest rates to historic lows, so the stock market folks felt like they could never lose.

Tailwind said...

William White can tell your readers a thing or two about trusting the Fed (as well as the other CB's) with more power.

From July 2009 Der Spiegel:


"White recognized the brewing disaster. The analysis department at the BIS has a collection of data from every bank around the globe, considered the most impressive in the world. It enabled the economists working in this nerve center of high finance to look on, practically in real time, as a poisonous concoction began to brew in the international financial system.

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative -- and hazardous.

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the "villain" in the global economy. "One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path," White wrote in 2006."

Breathtaking in their arrogance, now they want more ability to raid the coffers....

Read the entire thing here (,1518,635051,00.html)

Anonymous said...

The Fed is incapable of regulating the banks to reduce risk because the Fed is owned by member banks. Committee members appointed by member bank CEOs will vote to maximize member bank profits, not protect the interest of consumers.

Giving this conflict of interest ridden organization more power to regulate the member banks that own it is pointless. An organization that is not beholden to the banks is the only way to protect consumers.

Tim said...

Thanks Tailwind - I missed that one.

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