If the last two years has shown us anything, it’s that the Fed does a lot more than quibble with interest rates and make bland statements to Congress.
Washington Post business columnist Steven Pearlstein tries to re-imagine the Fed, and who would lead it. He makes two major points: One, the farm system for Fed chairmen needs improvement; and two, it has become too powerful.
On the appointment of chairmen:
Post: Whenever the Fed comes under serious attack, as it has recently, its reflexive response is to accuse its critics of jeopardizing the Fed’s independence. Yet if you think about it, the greatest threat to the Fed’s independence comes not from outside the institution but from a chairman and members who are so anxious to get reappointed that they begin to tilt policy to win favour with the White House or with Wall Street or take on a reluctance to criticise policies that they think harmful to the economy.
Pearlstein’s solution? One, extend the chairman’s term from four years to six but remove the possibility of reappointment. Two, stop appointing new members of the Fed’s board to fill the partial, unexpired terms of governors who leave. All new governors should be appointed to their own 14-year terms, without possibility of reappointment. Three, give more power, influence and visibility to the other governors, raising the bar so that those who are appointed show some promise of being chairman some day.
On the Fed’s power:
There is also legitimate concern about concentrating too much power and responsibility in the Fed itself. The financial crises of the last 20 years have only served to highlight the Fed’s vital role as lender of last resort and systemic risk regulator, in addition to the more traditional role of setting monetary policy. Given those priorities, the Fed should be required to give up its duties as day-to-day bank regulator, handing those over to a single, consolidated supervisor, as Sen. Mark Warner of Virginia has proposed. It should also be forced to relinquish its largely unexercised powers to regulate abusive lending practices to the new consumer protection agency proposed by President Obama. As long as they remain at the Fed, these functions will continue to get short shrift from top officials.
So who to lead this new and improved institution? Ben Bernanke. “Time and again during the recent crisis, Bernanke has been courageous and creative in his determination to do whatever was necessary to prevent a financial meltdown.”
There’s plenty to complain about with Big Ben — denying the housing, credit and speculative commodities bubbles and arguing the Fed couldn’t do much preemptively — but most economists agree: he should stay. Let’s see what Obama says.
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