April 07, 2015
The NYT article discussing Republican efforts to limit the Fed’s power to boost the economy presented an overly narrow view of the issue of the Fed’s independence. It contrasted efforts by Democrats to make the Fed more accountable to the president and the Congress, with Republican efforts to make the regional Feds stronger by giving the banks more control. The latter was described as increasing Fed independence.
In fact, the Republican path would make the Fed more dependent on the financial industry. This has been a serious problem in the past. Undoubtedly the Fed’s failure to crackdown on the housing bubble was due in part to the fact that the financial industry was making a fortune on the issuance and securitization of junk mortgages.
A Fed that is overly dependent on the financial industry is also likely to be more prone to raise unemployment in order to reduce the risk of inflation. The cost of this policy would be millions of fewer jobs and lower wages for tens of millions of workers.
If we want a Fed that can act in the interest of the general public it makes sense to try to increase its independence from the financial industry. The Fed is an unusual regulatory agency in that members of the regulated industry sit directly on the board of its regulator. By contrast, other industries have to hire lobbyists to influence their regulators.
Comments