Tuesday, April 01, 2008

Watch ouf for the Fed

I haven't had a chance to review the administration's proposals for financial-market reform in detail, but they seem to involve giving the Federal Reserve Bank regulatory power. Bad idea.

Most Americans don't realize it, but the Fed is an independent body, which means it is removed from political influence. Now, that might be a good idea when it comes to matters like monetary policy, but it's a bad idea when we're talking about regulating commercial and investment banks, trusts, etc., etc. Such regulation should be subject to political pressure; that's the theory behind democracy: that the people rule. That is especially true in the financial world, which ultimately depends on confidence. If the citizens feel that they have no influence on the process, they are likely to be much less confident about what's going on in the markets. If you want to know what happens when people lose faith in the market system, look up "The Great Depression."

Let the Fed do what it does. When it comes to regulatory functions, let those be carried out by agencies under the control of the executive and Congress.

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