Congress Looks at Reforming Fed

While I have been a supporter of the Federal Reserve returning to it's original mandate the thought of Congress moving rapidly and legislating change in the current heated atmosphere is disconcerting. The odds of the Congress addressing the Feds key problems and implementing the correct solutions seems lower than the Fed itself policing it's activities in a manner that best serves the public interest.

The House Financial Services Committee has already voted to repeal the Feds Audit Shield (The 1978 Congressional Exclusion of monetary policy deliberations, discount window operations, and related activities from GAO audit authority) and other congressional bodies are considering additional legislation.

I believe as stated before in this blog the Fed has exceeded it's mandate and grown progressively more powerful over time, culminating in engineering the bailout programs of the last year. However removing the Feds oversight of the banks and adding congressional oversight to it's originally mandated activities of setting monetary policy with the goal of interest rate stability is tantamount to removing the Fed and placing Congress in charge of these matters. Congress does not in my opinion have the necessary expertise to execute the policy decisions the Fed was chartered to make, nor are they capable of acting in the timeframe necessary to make these decisions effective.

The Fed has taken some heat over the bailouts and the economic condition we find ourselves in, and deservedly so. The Congress it should also be noted elected to Repeal Glass-Steagal, grant Treasury Secretary Paulson incredible discretion and funding, and act in many ways as an exacerbating factor both to the economic crisis, and the bailout mess. And now acting in haste due to a constituency enflamed by current conditions seems a recipe for less than optimal outcomes. It is a classic example of politically motivated individuals and groups acting in matters they are unqualified to judge, and likely do not fully comprehend. Blindly stabbing in the dark hoping to kill a monster they cannot see is not sensible, and will more likely cause harm than good.

The Congress should if anything reduce the Fed to it's original purpose outlined in the Federal Reserve Act of 1913, before they change the mandate and attempt to act in lieu of the Fed. The Fed should concentrate it's efforts on it's mandate and retreat from it's apparent desire to extend it's power to matters outside that mandate. The Congress in conjunction with the experts it has at it's disposal, including the former Fed Chairs can then take into consideration changing the Mandate to more accurately addressing modern economic and monetary conditions. They may find the original mandate to be a well thought out and effective set of policies not requiring any change.

References:
The Letter from former Fed Chairmen Greenspan and Volcker


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