In a recent op-ed, Federal Reserve Chairman Ben Bernanke arguesthat proposals in Congress to reduce the Fed’s powers or increase Congressional oversight are misguided. My reactions to Ben’s piece are as follows:
1. Given that the Fed exists, it probably made sense for it to lower interest rates in response to the financial crisis. The private sector expected this; had the Fed not undertaken these actions, the confusion generated might have been counterproductive.
2. The Fed should have argued vociferously against, rather than for, the bailouts of Wall Street banks. These bailouts probably made things worse rather than better in the short term by generating uncertainty and delaying appropriate adjustments in bank balance sheets. And the bailouts virtually guarantee increased moral hazard in the long term.
3. Granting more regulatory power to the Fed is silly. Regulation of large, complex, and constantly evolving finanicial market activities is not going to fix anything, since the financial sector will innovate around it. Worse, regulation gives some investors a false sense of security.
4. Giving Congress more oversight of the Fed is a terrible idea; libertarians, in particular, should be wary of fixing bad government with more government. The way to improve the Fed is to eliminate the Fed.
