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The Implications of the Federal Reserve as a Systemic Regulator

Tue, Jun 16, 3:54 PM ET, by Kenneth C. Bateman

One of the most important ideas in the United States government is the separation of powers, and the role that each branch of government performs. Briefly described, Congress makes the laws, the President enforces laws, and the Courts ensure laws are administered justly.

When it comes to the Federal Reserve, however, it exists by creation of Congress and is charged with a mandate of maximum sustainable growth and maximum employment. The appointment process is a political one: with the Chairman appointed by the President and confirmed by the Senate every four years, and the Governors appointed and confirmed in a staggered manner every 14 years. These appointments are specifically spaced in order to create a feeling of independence with the Federal Reserve, so that it may be free from external political influences in pursuit of its main policy objectives.

Yesterday, Secretary Tim Geithner and Professor Lawrence Summers suggested in a Washington Post op-ed that the Federal Reserve would be the best choice to serve a regulator of “systemic risk.”

The first question one must ask is what, exactly, constitutes a systemic risk. I suggest the definition mirrors that of Justice Potter Stewart when describing pornography: “I know it when I see it.” This famous, yet unhelpful, definition shows a fallacy in the idea of systemic risk; what is systemic risk to one person is merely the failure of an unprofitable and poorly managed institution to another.

More importantly, making the Federal Reserve perform the actions of a regulator is likely to compromise its independence, as it will be performing a function that is reserved for the Executive Branch. Rather than being allowed to focus exclusively on its current mandate, appointment as a regulator is likely to create an organizational feeling of subordination, where the Federal Reserve over time views itself as a policy implementation tool of the Executive Branch.

While the Framers intended each branch of government to be equal and moderately adversarial, the implications of the Legislative and Executive branch passing Keynesian policy with the Federal Reserve complicit is a sure path to ruin. In a sense, this is what is going on right now, with the Federal Reserve agreeing to buy treasuries in order to fund the additional debt obligations of the government. While perhaps a necessary evil in the short term, the implications of this as a long-term policy are disastrous.

 


SDI Glossary: "the Fed" Definition
This Article's Word Cloud:   Branch   Congress   Executive   Federal   Governors   President   Reserve   United   While   Yesterday   appointed   appointment   branch   charged   choice   confirmed   constitutes   create   definition   each   every   famous   feeling   government   growth   implications   independence   laws   likely   mandate   maximum   moderately   most   order   perform   performing   policy   political   regulator   risk   short   systemic   term   that   this   unprofitable   what   when   with   years

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