Don't expand the Fed's roles and responsibilities

Thursday, December 3, 2009

Regarding Federal Reserve Chairman Ben Bernanke's Nov. 29 Sunday Opinion commentary, "The right reform for the Fed":

As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years. In addition to conducting monetary policy, the Fed also distributes currency, runs the system through which banks transfer funds, supervises financial holding companies and some banks, and writes rules to protect consumers in financial transactions. Mr. Bernanke argues that preserving this mélange is not only efficient but crucial to protecting the Fed's independence.

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed's role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don't think they will be able to do so.

The biggest threat to the Fed's independence is doubt about its competence. The more the Congress expects the Fed to do, the more likely will such doubts blemish its reputation.

Vincent Reinhart, Washington

The writer is a resident scholar at the American Enterprise Institute.


Fed Chairman Ben Bernanke does not want us to know the details of the Fed's secret operations. This is not surprising. During its 96 years, the Federal Reserve has played havoc with our economy and achieved what only a central bank can: a steady depreciation of our currency. Today's dollar is worth 5 cents compared with the dollar entrusted to the Federal Reserve in 1913.

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