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The All Powerful Federal Reserve

Posted by Larry Doyle on June 12, 2009 8:10 AM |

What would our founding fathers think about the omnipotence of the Federal Reserve?

Is there any doubt that the true greatness of our Constitution is found in the balance of power amongst the executive, legislative, and judicial branches. Where in that mix is the power centered in the financial branch? Who controls the financial branch? Welcome to the kingdom of the Federal Reserve.

To whom does the Fed answer? How transparent is the Fed? Can the Fed be too powerful? Is the Fed “too big to fail?” How skilled is the Fed? Is it infallible? Does the Fed get involved in our political process? So many questions. Such limited clarity.

As our Brave New World of the Uncle Sam Economy evolves, the Fed has never been more influential in our economic and political process. Is the Fed too powerful? Let’s navigate the landscape of the Fed and see what we learn.

Rather than my regurgitating answers to frequently asked questions of the Fed, please allow me to link to the Fed’s own site for these “frequently asked questions.

Let’s dig deeper. I want to specifically address, two specific aspects which fall under, What are the Federal Reserve’s responsibilities?

-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

Looking back over the course of the last ten years, how could any self-respecting central banker, politician, financial executive, market analyst, or financial blogger give the Fed anything other than a failing grade in these realms. Does that failing grade deserve to be assigned more to former Fed chair Alan Greenspan than Ben Bernanke? Perhaps, but the Fed as a whole failed miserably on these critically important initiatives.

As we move forward on our economic landscape, how will our “political leaders” within the executive and legislative branches address the allocation of responsibilities within the financial system?

The all powerful Fed is likely to get even more powerful. Bloomberg reports, Geithner Said to Tell Bernanke Fed Gains Most in Rules Overhaul:

The Federal Reserve is likely to emerge as the most powerful regulatory agency in the Obama administration’s plan for overhauling financial market oversight, people familiar with the proposal said.

Treasury Secretary Timothy Geithner told Chairman Ben S. Bernanke in a June 9 meeting the administration will call for the Fed to be the regulator of firms deemed too big to fail, one of the people said. While a council of regulators would share oversight of financial risks, Treasury officials describe it as weak, lacking power to make final decisions on intervening with the firms, the people said.

Is this a wise move on the adminsitration’s part? Are they concentrating too much power within one organization. I believe so. Congress may attempt to question the reasoning and efficacy of granting the Fed even greater powers. That said, this Democratic Congress will fall in line behind the Democratic administration. Any Congressional concerns, in my opinion, will serve more as pandering than legitimate legislation.

It should not take a former SEC chair to ask the hard questions and shed light on Fed failings. Bloomberg reports,

The proposal to give the Fed enhanced duties has also drawn criticism from former regulators, who say the central bank failed to curtail business practices that triggered billions of dollars of losses at financial institutions after the U.S. mortgage market collapsed in 2007.

“If the Fed hasn’t been worried about systemic risk all these years, then people really should be fired,” former SEC Chairman Richard Breeden told lawmakers in March. “Rather than simply calling for more authority for people who didn’t use the authority they already had, we need to reexamine why our regulators missed so many of the risks staring them in the face.”

Stay with Sense on Cents as I will continue to navigate the paths and policies of “The All Powerful Federal Reserve.”


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