Saturday, November 28, 2009
What Fed Independence?
"The [Fed] in coming years will probably become highly politicized and thus lose its quasi-independent status. This is because of past shortcomings in its policies and, more importantly, of difficult decisions that face it in the year just ahead. ... While Fed governors serve a 14-year term, most of them step down well before the end of their terms. ... Still, past presidents have hardly been effective at controlling their Fed chairman. ... So, why should be be concerned that the Fed will become highly politicized now? First, there is the Fed's legacy of its inability to limit past financial excesses. By failing to be an effective guardian of our financial system, it has lost credibility. ... The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentraion through mergers and acquisitions and this contribute to the 'too-big-to-fail' phenomenon. ... If an overwhelming proportion of our financial institutions are deemed too big to fail, monetary restraint would fall heavily on institutions that are not. ... Taken to its logical conclusion, our market-based system of credit allocation would be replaced by a socialized system and the [Fed] would become part of it. A much better approach would be to prohibit any financial institution from becoming too big to fail. This would require that regulators downsize large financial conglomerates", my emphasis, Henry Kaufman (HK) at the WSJ, 11 November 2009, link: http://online.wsj.com/article/SB10001424052748703574604574501632123501814.html.
I agree in part with HK. I say we have socialized credit now. Further, that Fed "independence" is and always was a fraud. Kill the Fed. I saw what Glass-Steagall's repeal would bring. HK in effect argues TBTF executives should be civil servants. The Fed was obviously politicized from 1942-1951, see my 19 April 2008 post: http://skepticaltexascpa.blogspot.com/2008/04/intellectual-honesty-and-housing.html.