I like the Federal Reserve. It’s got more smart people working for it than any other governmental agency (or quasi-governmental agency) that I know of. They tend to see their job as doing what’s best for the economy (or at least the banking system), not scoring political points or aiding lobbyist friends.
Yet when you look back at the causes of the financial crisis, you’d have to say that the Fed’s failure to do anything to rein in the credit bubble of 2003-2006 was one of the biggies. I’m talking not so much about monetary policy as what the Fed didn’t do on the regulatory front. It clearly had the power to put a stop to the ruinous practices of the mortgage business—it adopted new rules last year that would have thwarted much of the craziness of subprime and Alt-A if put in place earlier. But it chose not to. It was also the only regulatory agency that conceivably could have done something about the massive growth in off-balance-sheet libailities in the banking system. Again, nada. Perhaps more of the blame for all this lies with Alan Greenspan than with the Fed as an institution, but that just goes to show the dangers of the Fed’s discretion-heavy approach.
So it’s been interesting to see how just about every new regulatory reform proposal coming out of Washington looks to increase the Fed’s power and to increase the Fed’s discretion. Reports Bloomberg today:
The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.
The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said.
Now I’m not saying the SEC—which is set up more as a rules enforcer than as a discretionary regulator—covered itself in glory over the past few years either. And I’m all for a regulatory structure that’s based more on regulatory function than financial-sector history. But anybody who really thinks those smart people at the Fed are going to use all those discretionary powers they’ve been given in an optimal fashion needs to go study some history and some behavioral economics.