Like oil and water, the Federal Reserve and transparency do not mix. Or, as the incisive Bill Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country, wrote in a recent cover story for The Nation: "The Federal Reserve is the black hole of our democracy—the crucial contradiction that keeps the people and their representatives from having any voice in these most important public policies." Who can forget former Fed chairman Alan Greenspan's almost mystic proclamations about the US economy and monetary policy? Or the virtues of financial deregulation, supposed wisdom that the Beltway elite took as if from the mouth of an oracle? (Wisdom, that is, that even Greenspan later conceded was largely mistaken.) And, of course, nearly all of the Fed's role in the ongoing panoptic financial bailout has been shrouded in secrecy, with the Fed refusing audits of its books and media outlets like Bloomberg News forced to sue the public-private hybrid institution for information.
So why, then, does the Obama administration want to give the Fed more power under its financial regulatory reform proposals? A good many experts—journalists and economists, among them—think this is a terrible idea. Having pored over some of these commentaries and analyses, here are four reasons why the Fed's power grab should be foiled:
1. As Stanford economist John Taylor writes in the Financial Times, the Fed, under the new financial regulation proposals, would be given the power to supervise and regulate the largest, most interconnected financial institutions. Known as "too big to fail" because they pose "systemic risk" to the system, these would include institutions like pre-crash AIG, Citigroup, and Bank of America. This new role would broaden the Fed's role considerably, and given the questions raised over the Fed's original charge—controlling the supply of money and, by extension, interest rates—this would amount to considerable, and troubling, mission creep for those wonky Fed staffers. In other words, stick to what you're good at, Bernanke and Co.
2. The Fed is supposed to be an apolitical body; after all, do we really want the people in charge of printing our money and determining interest rates susceptible to the vicissitudes of partisan politics? Yet, as the current bailout has shown, the Fed's decisions to take part in and weigh in on controversial financial issues (e.g., the forced merger of Bank of America and Merrill Lynch) can taint the Fed's image. Now imagine the Fed is regulating these kinds of banks on a daily basis. Politicization of the stolid institution would soon follow.
3. Greider writes in The Nation that the Fed actually created some of the structural flaws that led to the financial crisis—namely, allowing Citigroup to merge into a massive, financial/banking behemoth, and this before the repeal of Glass-Steagall. Thus the Fed couldn't objectively regulate these banks because it "is deeply invested in protecting the banking behemoths that it promoted, if only to cover its own mistakes." Taylor, in the Financial Times, similarly writes that the Fed could adjust monetary policies to shield and protect these "too big to fail" institutions to prevent them—a serious conflict of interest.
4. The transparency argument. The fact that the Fed's role in the bailout has been so opaque, and that Bernanke and his acolytes have failed to shed any light on their dealings even to Congress, bodes ill for future Fed powers. It's bad enough that the Treasury has struggled mightily with issues of transparency and oversight; to add another institution into the regulatory mix makes little sense. Surely there are other means for regulating "too big to fail" institutions?