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Has the Federal Reserve Become Too Powerful?

by: John Mason April 30, 2008    

John M. Mason

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Is the Federal Reserve becoming too powerful? This question comes up following the events of the arranged marriage of Bear Stearns (BSC) with JPMorgan (JPM), and comes up following the Fed’s trading of U.S. Government securities for other securities of lesser credit held by securities dealers. It appears again after the Federal Reserve has created its new auction facility for bank reserves, which is in addition to its role as providing the “Greenspan put” to protect investors on the downside of an asset bubble.

There is also the role of providing liquidity to the financial markets when there is a liquidity crisis. The Fed also has responsibility for examinations of commercial banks and enforcing regulatory requirements, as well as many other responsibilities the Federal Reserve is charged with, including the check-clearing system.

Furthermore, the Treasury proposal for the modernization and strengthening of the regulatory system puts the Federal Reserve at the center of the new regulatory universe.

Then there is monetary policy. If inflation is “everywhere and at every time a monetary phenomenon” then the Federal Reserve has responsibility for conducting a monetary policy aimed at maintaining relatively stable prices.

There are two problems connected with this plethora of responsibilities. First, the different responsibilities can have different, even conflicting objectives. By resolving one difficulty, the Fed may be creating another difficulty that must be addressed by another one of its functions. As a consequence, the Federal Reserve may always be attempting to resolve something that it initiated itself in other actions. For example, how does the Fed avoid a financial crisis and constrain inflation at the same time?

Second, when difficulties occur, the public turns to the Federal Reserve as the “savior of last resort” regardless of what the difficulty is. The public is not turning to the Treasury Department, or the SEC, or any other branch of government. It is turning to the Fed as the only agency that can resolve the problems.

The Federal Reserve cannot be allowed to lose its focus! Over the past twenty years or so, nations around the world have discovered that central banks must be independent of its national government in the conduct of economic policy and the central bank must have inflation as its primary focus. While other central banks have taken on this approach to central banking and while many of them have accepted ‘inflation targeting’ as they primary operating function, the Federal Reserve System in the United States has moved in the opposite direction.

Jean-Claude Trichet, the president of the European Central Bank [ECB] stated on Monday that the ECB would set interest rates based on “no other considerations than the delivery of price stability in the medium term.” That is, the ECB cannot be counted on to set interest rates to help the Americans with their financial and economic problems or on anything else at the present time. The focus is on inflation because that is the responsibility of a central bank.

We, in the United States, must be careful going forward in what we ask of the Federal Reserve. Within the current environment there may be too much of a vacuum in other areas of the government to provide the Fed with much assistance in tackling the problems that lie ahead. However, we must beware of what power is given the Federal Reserve, for in adding more responsibilities to the Fed’s portfolio, people will only be causing the Federal Reserve to reduce its attention from the main thing it should be doing.

If this happens it will only create more problems for us in the future.

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This article has 14 comments:

  •  
    Apr 30 08:34 AM
    The Fed's primary focus has not been inflation and we are seeing the disastrous results. No doubt the fed has cut rates way too far. Looks like the 1970's all over.
    Reply
  •  
    Apr 30 08:35 AM
    The Federal Reserve is not accountable to the electorate. It's clear that it is accountable to big money. As we fight to bring Democracy to other parts of the world, maybe we should fight to bring it to the United States of America. Great article by John M. Mason.
    Reply
  •  
    Apr 30 09:06 AM
    this is a question that is and should be brought up more and more

    my basic stance is:

    1) if our monies are gonna be used, then, we the people as a whole and individually, should be the main beneficiaries of policy, not legally created entities

    2) if our monies are gonna be used, no closed doors, delayed transcripts of meetings, and actions allowed not specifically allowed by the electorate

    3) an equal # of representatives on the fed should be from a general nation-wide election by popular vote; so there would also be one person-one vote reps, not just one person-most money reps

    4) actual treasuries should be required to be available to all americans via all savings vehicles, including 401's


    now, all this may just show how little i know, but at least you also would know i care :-)
    Reply
  •  
    Apr 30 09:38 AM
    The Treasury & SEC eh? The author can't be serious, neither of these two agencies have done much at all about the problems laid at the Fed's door. Paulson is a disgrace & a Bush Admin. pawn (A/k/a a YES MAN!) The SEC is impotent as well, have you seen them at the forefront of anything worthwhile lately? What is their role, bystander personified?

    I'm no Fed fave either, but who else was there to fall back on when Bear's creditors demanded their money? There was a run on Bear's bank, get over it Mr. Mason, you not only missed the boat, you missed the marina!
    Reply
  •  
    Apr 30 10:23 AM
    You missed the point, SageNot. Fiscal policy needs management obviously. Quality management would be nice don't you think? The problem is how to get there from here. Mr. Mason is just saying that the Fed is becoming less capable and more powerful.
    Reply
  •  
    Apr 30 12:33 PM
    The Fed is in a lose-lose position. Its bandaid policy may prevent an abrupt recession leading to a possible depression, but won't stop the further economic slowdown that is the result of past financial excesses which will continue to occur unless we hold the captains of the financial industry accountable.

    The CEOs and their lieutenants cannot expect to be richly rewarded for the mischiefs and the destruction of their companies and the ruin of their shareholders. Until this irrational reward system is fixed, we can expect further troubles down the road.

    Demand that the shareholders must approve any compensation package of the top executives; this will go a long way in stopping the rot on the wine. Let the forces of the market take care of the rest.

    The Fed should not manipulate the economy through hot and cold monetary actions. This adds to the market instability and encourage opportunistic behavior. Corporate welfare is as bad as welfare to able bodies.
    Reply
  •  
    Apr 30 01:43 PM
    Jim Frugal... it appears to be a fait acompli for the chiefs you mention. Where's the SEC in all this. Irrational reward system and selective enforcement.
    Reply
  •  
    Apr 30 01:54 PM
    The Federal Reserve has no power in and of itself. It is run soley by the whims of commercial bankers. Prove me otherwise.
    Reply
  •  
    Apr 30 02:12 PM
    The time has come to


    TakeBackTheFed.com
    Reply
  •  
    Apr 30 03:59 PM
    The Fed's imprimater was conferred by the socialists during the Volcker tenure. Dimocratic congressmen decided that having the FED disclose more in public forums would expose their faces to the public via TV. So, there is endless facetime between FED chair and Senators/Reps frequently for no apparent reason except to get Dimocrats better known by bored TV viewers. Ergo, the public looks to the Fed for all the answers.
    Reply
  •  
    Apr 30 06:44 PM
    To Mr. Mason's first point, I'm not convinced that any of the "new" objectives actually conflict in the ordinary course of conducting policy. I have to add that caveat because, clearly, what has been happening is not "ordinary". For example, saving Bear Stearns (a joint action with the Treasury that simple had to be done) was extraordinary and required actions that the Fed would not have had to pursue under "normal" circumstances. It could be argued that having broader and multiple policy directives, ala the Treasurer's proposal for example, under "one roof" could have improved the government's policy action to the growing crisis. I'm suggesting that having disparate agencies (Treasury, Fed, SEC, Comptroller, etc.) responsible for the various aspects of monetary policy more broadly characterized has been a source of delay and inadequacy.

    To be clear, I don't see how the accepted inflation priority conflicts with sound management oversight of the actions and activities of any intermediary that handles the nation's credit.

    Finally, I don't see how adding to the "power" of the Fed (see Mr. Mason's last paragraph) necessarily has to dilute its ability to carry out any of its responsibilities. There has been a tremendous evolution in world finance since 1913, which is the year the Fed was created (if I remember correctly). In the interim, politicians have responded to various crises with legislation to handle each of those crises. The time is ripe to reconsider the structure of all these multiple agencies, with their different agendas, constituencies and leaders, to assure ourselves that our governmental infrastructure is in some sense "optimally" configured to address the world of finance we live in now.

    I have been a respondent to several SA articles but have never had a response from the original author. I ask Mr. Mason to respond; I value his insights.
    Reply
  •  
    May 01 02:32 AM
    Good point made in the article- the Fed is reacting to circumstances that were created in part by earlier Fed action.

    The Fed benefits the banks at the expense of the rest of the economy. And no, the economy isn't the banks. They let banks, and now securities houses run their leverage up to the hairy edge to maximize profit, then when they fall down, they're hedged by the Fed.
    Reply
  •  
    May 01 07:36 AM
    From Wikipedia;

    President Woodrow Wilson after creating the Federal Reserve said:

    "A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."
    ~ Woodrow Wilson
    These "dominant men" are taking care of themselves first.
    Reply
  •  
    May 02 12:54 PM
    Mr. Mason, you are saying things I have been thinking and talking about for quite awhile. I think the Fed has had way too much power since its inception in 1913. And the current state of things is pushing more control their way, not less. I think it is by design though, not being "put upon" them.

    Do you agree the Fed is not a government institution, but instead owned by public/private banks which are controlled by wealthy families, i.e., Rockefellers, Warburgs, Rotschilds, etc...?

    Only Congress can take power away from the Fed; as I understand it was they who handed over their power to print money to the Fed. Is it realistic to think anyone in Congress knows enough to consider such a challenge much less take a stand and actually do something?

    I think our country has been slowly hollowed out by the Fed's actions over the years, including getting Nixon to abandon the gold standard in 1971. Our money is worth so little compared to then with the continual devaluing of the dollar. Very few people know the true effects of inflation on our standard of living.

    Do you agree that the JPM/Chase buyout of Bear Stearns was the Fed trying to prevent the credit default swaps counter-party house of cards that was going to tumble if Bear went bankrupt? And didn't JPM/Chase get to "cover" any trades they surely had which were tied to Bear?

    I keep thinking the other "big" shoe is yet to drop in all this ($46 trillion in swaps where many unknown counter-party disasters have to be festering) and the Fed is going to wind up with more control than ever before.

    Your bio says you had a stint at the Fed. Am I off base in thinking that Mr. Dimon, because he is a member of the Fed committee, was "too close" to put the "rescue" deal together? Or am I incorrect that JPM Chase is one of the largest, if not THE largest, shareholder of the very private Federal Reserve?

    If I am wrong about JPM/Chase ownership, can you tell me how any US citizen can determine with certainty the ownership of the Fed? Where are the records and details of ownership?

    I think most Americans are clueless about the nature of the Fed and "monetary" policy. I also think the US is just a tool for an overarching global group of families that control the Fed. But you've worked there- can you explain the ownership and intent of the Fed?

    Just because a group's actions are a called a conspiracy doesn't mean it isn't true. I think the more one plumbs the depths of the Fed, the murkier things get. And for good reason. These are things we aren't supposed to know, or even ask about.

    I think if enough Americans would ask their representatives in Washington, why the Fed has the authority it does to print our money, and keep asking the question repeatedly when they get the same wrong answer(s)over and over again, we might just start a process that unravels the mystery.
    I ask everyone I meet to ask this question of their representatives, and would ask you to do the same. "Why is the Fed printing our money, when according to the US Constitution only Congress has this authority?"

    Once an honest answer is finally revealed, the next would be "Why did Congress lend this power?".

    And I think the next question would be "Should Congress consider taking back some, or all, of the power to print US dollars?"

    And somewhere, in all of the discussion might come the answers to who owns the Fed, why we've been on/off/on/off again the gold standard, and probably some nuggets on our dependence on foreigners for energy and capital.

    Is it possible our country could start talking about the truth in these issues, and how our standing in the world is being manipulated for the benefit of the true owners of the Fed and manipulators of global money supply?

    I get labeled a conspiracy theorist because no one I have ever talked to, or heard/seen on TV or other media, can answer these basic questions. People think I’m crazy to even care about such things. I don’t think they are crazy, but have just been blissfully ignorant until now. So many very strange things are happening economically now, and the inflation we’ve been swept up in for 40 years is finally starting to be known as the sickness it is and even joe citizen is starting to say we’re in way over our heads.

    Any chance you have any answers? If not, our country desperately needs some people that are respected in the field of economics to step up and lead the questioning. I’m hoping you can help out.

    Reply
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