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Digg
Bullet dodged.
As Congress moves toward its endgame for overhauling the nation’s financial regulatory system, it appears to be taking heed of an aggressive campaign by Federal Reserve officials to prevent the bank’s rate-setting and bank-supervisory powers from being curtailed. Indeed, it looks as if everything the central bank considered most important to have, it’s getting.
From Chairman Ben Bernanke down to the regional reserve presidents, central bankers feared most particularly a drive in Congress to audit the Fed’s monetary policy decisions. They also worried that as legislators shuffled bank supervisory portfolios, the Fed would be left with the responsibility of watching over only the largest banks.
So far, it appears that neither of these fears will be realized. The Senate’s version of Fed auditing is much softer than its advocate, Sen. Bernie Sanders (I.,Vt.), initially wanted. Rather than authorizing audits of interest rate decisions, the legislation has been reduced to a one-time inquiry into emergency lending activities. The Senate took action that would keep the Fed in the game of watching over smaller banks, not just the Wall Street titans many consider to be too big to fail.
These are notable victories for the Fed, made all the more remarkable given how much political grief central bankers have gotten as the public and Congress have reacted to the radical interventions and bailouts undertaken by the central bank since late 2007.
Central bankers loathed most especially the auditing amendment, which was first given life by one of their most persistent critics, Rep. Ron Paul (R., Texas). The Fed argument was basic and went to the core of what most agree is the importance of central bank independence: audits of monetary policy will politicize the process of changing interest rates. As officials see it, that would erode confidence in central bank actions, leading to higher inflation and economic instability.
Most private sector economists agreed with the Fed’s case. They place great weight on the idea that expectations of inflation strongly influence actual inflation. If investors and the public believe the Fed is being cowed by Congress into keeping policy easier than the economic outlook dictates, actually inflation will begin to rise.
The battle over supervision was less clear cut, but still critical. Worries about what Congress was doing led several regional Fed bank presidents to lobby legislators directly. Some central bankers made the case that leaving the Fed with oversight over only the largest banks would create a de facto class of too-big-to-fail institutions. Also, Fed officials felt taking away oversight of small banks would deprive them of key financial information, leading to less effective monetary policy. Some officials feared for the very relevance of the 12 regional Fed banks.
The Senate earlier Wednesday passed an amendment restoring Fed oversight of community banks. Federal Reserve Bank of Kansas City President Thomas Hoenig said that “removes a potentially dangerous provision of the Senate bill that would have given special treatment to the largest financial institutions.”
“That is encouraging because it suggests support for comprehensive solution to the problem of too-big-to-fail firms,” he added.
As long as the legislative process refrains from generating fresh surprises, it increasingly looks like the Fed will come out of the overhaul process stronger. While it leaves the central bank with powers much like those it’s already had, the process has driven the central bank to become more open about what it has done, and officials have suggested they will be even more forthcoming about the details of some of their emergency lending.
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So according to the author…by not allowing the a real audit..the Fed will become more open? Ok what reality is Mr. Derby in?
This is perhaps the worst article even in the RTE..I know the RTE writers favor central banking and fiat money but come on…given the Fed’s record..how can anyone defend this beast? Unless they profit from it…
But the times are a changing…Rabbi Ben thinks he put this one down..smashing freedom and liberty…but I beg to differ…this genie isn’t going back into the bottle…
The American people are getting smarter…
End the Fed…I killed the 2nd Central Bank of the US…it can be done!
“Most private sector economists”…what kind of objective journalism is that? Which ones? Are they only keynsian? How manyAustrian school economists? Were these economists correct in predicting the financial crisis?
What is the problem with the WSJ..they seem to believe Central Banks have some sort of God like natural right to exist…only through central banks can we ensure inflation doesn’t rise..what a bunch of baloney.
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