Sunday, November 15, 2009

Dodd's Fed Folly

TThe current economic crisis has many causes. Among these are the actions of the Federal Reserve chairman in keeping interest rates artificially low and the resulting housing bubble. Proposed legislation to attempt to tinker with the Fed’s authority was inevitable. Ron Paul first called for an audit of the Fed. Now Chris Dodd has stepped to the plate and proffered his plan to fix the system.

Dodd’s proposal has several key factors. First, gone are the Office of Comptroller of the Currency (regulates and supervises national banks) and the Office of Thrift Supervision (which supervises lending institutions). Second, Dodd proposes to strip the Federal Reserve and the Federal Deposit Insurance Corporation of autonomy in overseeing the banking industry. Control would instead be given to a new agency, the Agency for Financial Stability. The FDIC would still insure bank deposits but have no responsibility to maintain stability in the system. Additionally, Congress would have much more control over the Federal Reserve’s regional banks with a say in their choice of directors and Senate approval of their chairmen. The Fed would still control monetary policy but lack supervisory authority over banks.

The problem with Dodd’s proposals is again the problem of more government, not better. While the Fed has made errors that contributed to the crisis, adding more government oversight isn’t the answer. The more influence politicians have over monetary policy and stabilization of banks and lending, the more power and influence they can wield at the expense of taxpayers and investors. Additionally, the proposed Agency for Financial Stability does not appear to propose new or different ideas for managing the economy. This all feels a bit like a shell game- shifting responsibility but changing nothing. Remarkably, even the Obama White House thinks Dodd’s plan goes too far.

In the wake of the economic crisis, it was inevitable that the Congress would step forward and attempt to tinker with the powers of the Federal Reserve system. Although the Fed is flawed, Dodd’s proposals would inject politics into market supervision in a way that can only slow the Fed’s response to any future crisis while failing to address any of the real causes of the current recession.

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