June 11, 2010 Reading Time: 2 minutes

Blame goes to the Fed. They allowed a financial crisis due to lack of regulation and oversight of the banking/financial industry. At least that is the claim of today’s policy makers. While I may not disagree that the Fed holds much of the responsibility for the mess of the last few years, but I do disagree with the reasons that Washington is citing. The Fed had too much control on the nation’s money supply and interest rates, rather than too little control of the banking industry. Of course it was more complicated even than that simple statement and Washington shares much of the blame for what happened along with the Fed. Yet that is an argument for another time.

The concern at the moment is Washington’s reaction to what it sees as the Fed’s failure to regulate enough. The solution being put forth is to have Fed positions fall under Presidential appointment. (insert link) The Fed is on edge at the possibilities of such measures. Rightfully so. I’ve previously voiced my objections to having Congress take control of the Fed. Having the President become more firmly entrenched as the power behind the Fed, controlling the appointments of who leads the individual banks, is no less dangerous. It is possibly even more so. Those who would argue that such appointments would somehow make the Fed more accountable have obviously never heard of such ideas as a political business cycle.

Having the voting members of the Fed even more beholden to the administration, current and future, would lead to more influence by the President. And long-term economic thinking is not in the interest of a President, who at most, has 8 years to create a good impression and lasting legacy. The desire to be remembered as a “good” President is far more prevalent than is the desire to set up institutions that create growth into the next 50 years. Each President inherits the economic success or woes of the past Presidents. If the current one can make a few small improvements at the cost of future crashes, he will only be remembered for his improvements. A future administration will hold the bag for what comes next.Letting the politics further into the Fed is a recipe for disaster. They will be more “accountable”, but not to the public. They will be held accountable in terms of whether they follow the whims of the latest administrator trying to make a name for himself.

 
Tom Duncan
Sound Money Fellow
Atlas Economic Research Foundation
 
Image by Salvatore Vuono / FreeDigitalPhotos.net.

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