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Who does The Fed really answer to?MIT Professors Simon Johnson and Daron Acemoglu believe the answer is Wall Street.
Writing on the New York Times’ Economix blog, the pair say that the era of Fed “independence” that prevailed for the past 30 years has been eroded by investment banks.
Of course, the Fed by definition represents the interests of the country’s banking sector.
Which means that the problem probably resides in banking firms themselves, not necessarily with the institution created to monitor them.
Anyway, here’s some of what the professors had to say:
“Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives,” they write.
“Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse.
“In principle, the Fed could stand up to the bankers, pushing back against all specious arguments. In practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector “experts.” Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers.”
“In recent decades the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear – for example, over deregulating finance, keeping interest rates low in the middle of a boom after 2003, providing unconditional bailouts in 2007-8 and subsequently resisting attempts to raise capital requirements by enough to make a difference.”