Symposium 2011: What reforms, if any, would you suggest be made to the Federal Reserve? Should the Fed’s dual mandate to achieve maximum employment and price stability be repealed or should there be specific targets for each?

RMC:  Well, I think the Federal Reserve has a useful purpose but it has been responsible for the biggest economic disasters in the past fifteen years.  Low interest rates fueled the internet bubble back in the late 1990s.  That didn’t turn out too well for the economy or stock market.  And accommodative policy helped fuel the real estate bubble and we’re still trying to recover from that. 

Now, having said that, they have responded as best they could in addressing the credit crisis and all that has happened since then.  Sadly, it appears they’ve become a repository for the toxic loans from the banks.  It looks like the Fed may have transferred those to their own balance sheet by playing a financial shell game with the big banks to keep the institutions solvent.  I agree with Ron Paul that we need a full and complete audit of the Fed.  Let’s get it out there in public what they’ve got on their balance sheet.  Chairman Bernanke is all about transparency, so he should put his money where his mouth is in this case.  I’m afraid that what we may find is that the banks have pawned off the toxic debt onto the taxpayers while they got huge financial bailouts.  They had their cake and ate it to—got money from the taxpayers and stuck the taxpayers with toxic assets.


We think the Fed needs to be the lender of last resort and regulator of the banks, first and foremost.  They need to be there to ensure a fully functioning and liquid financial system.  If the Fed had raised the bank reserve requirements, we may have avoided this whole real estate meltdown.  With the low reserve requirements, the banks were able to lend out more money, jeopardize their stability, and fall into a moral hazard of making risky loans.  There’s an old saying that central bankers take away the punch bowl just as the party is getting started.  Perhaps they need to revisit that adage.  There’s some wisdom in it. If they had been more hawkish, we may not be in the situation we’re in today.


Cartwright:  Let’s keep the Federal Reserve but focus on making them a bank regulator and guarantor of liquidity.  Ron Paul is right to be calling for a full audit of the Fed.  We probably don’t want to know what they’ve got on their balance sheet.  I suspect they’re now the biggest holder of toxic mortgages in the world.


But the Fed does provide an important function in the financial markets and that is to ensure a liquid and functioning banking system.  Where would we be today if the Fed hadn’t been there to provide liquidity during the credit crisis back in 2008?  They kept the financial system functioning properly then.  They kept it functioning after 9/11.  So, I think it’s a little foolish to say we should get rid of the Fed.


With regards to the dual mandate, I’m not sure the maximum sustainable employment mandate is really a good one for them to have.  Price stability relates mainly to inflation and the money supply, which the Fed can directly control.  I think that needs to be their focus, but I’m not for formal inflation targeting.  I think we are better off to have the Fed focus on stability in the banking system as opposed to employment mandates.  Obviously, the banking system wasn’t as sound as it should have been.  Otherwise, we wouldn’t have had the problems with the mortgage market and had to bail out some of the banks.


Michigan:  The Federal Reserve was not intended to be an employment agency.  A dual mandate for the Fed to maintain our monetary stability and achieve maximum employment is not working.  The Fed needs to get back to basics—bank regulation and audit.


Sydney:  I guess it’s not surprising that Republicans are lining up to attack the Fed. After all it’s a pretty easy target given that it doesn’t seem to have had much success at boosting the economy. The problem with politicians is that they are focused on short term outcomes, usually that means winning the next election. This is the very reason the Fed is independent, so that it’s policies aren’t changed from year to year to the detriment of the economy in the long term.


On balance, aiming for maximum employment and price stability in the long term seem to be perfectly reasonable goals. The Fed can’t be expected to clean up the mess created when a Government spends beyond its means, or when bankers cause a global economic crisis.


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