American Republic Online

The Bush administration is going to propose new regulations in the financial markets, and propose consolidation of regulatory power.  It is dressed in an “effort to limit Washington’s role in the market.”  But I’m not so sure.  The idea of consolidating power is, not surprisingly, unappealing to me.  This is especially true for an organization such as the Fed that has remained somewhat politically independent to this point.  Indeed, the Fed must be as politically independent as possible.   Can you imagine a room full of politicians deciding (even discussing) the issues faced by the Fed?

Well, what about a Fed that must answer to political posturing?  A Fed that must answer to Congress’ every whim and fancy.  In fact, the Fed is facing this very issue.  John Mauldin fills us in:

Basically, there are two vacant seats on the Fed. President Bush has nominated two very qualified people with distinguished records and backgrounds who have hands-on experience in real-world banking, as opposed to being academicians. These are not political appointments, but serious economists.

[Senator Chris] Dodd refuses to allow these nominations, or any others, to move forward…

 Why would Dodd do this? He has made it clear that he is not happy with Fed policy, as has his counterpart in the House, Barney Frank; so some of this is just personal pique. They want the Fed to respond to their political goals. But some of it is clearly partisan. If there is a Democratic president, they would be able to immediately nominate three new governors, and would not have to reconfirm Ben Bernanke as chairman, which means he would leave and the new president would appoint the chairman…

Whoever the new president is, they will get to nominate who they like as governor terms come to an end. But to act as Dodd is currently doing threatens the independence of the Fed, which is a critical part of the economic world. You can criticize the Fed and their policies, and I often do, but every right-thinking person agrees that Fed policy should not be set in Congress and subject to political whim.  The last time we had a Fed chairman who let politics suggest policy was William Miller under Jimmy Carter, and that did not turn out well.

Indeed. A Fed with more consolidated power would be that much more threatened by political pressure.