- What Powers for the Federal Reserve?
Journal of Economic Literature, Vol. 48, No. 1, March 2010,
In this essay, I explain my reasons for the following policy recommendations: (1) The Fed should continue to manage monetary policy as it has in the past, should act as the nation's lender of last resort, should fully supervise the large bank holding companies and their subsidiary banks, and should be given resolution authority over the institutions that it supervises. (2) While a council of supervisors and regulators can play a useful role in dealing with macro prudential risks, it should not replace the central role of the Federal Reserve. (3) The virtually unlimited lending powers that the Fed has recently exercised in creating credit and helping individual institutions should be restricted in duration and subjected to formal Treasury approval backed by Congressional preauthorization of funds. (4) The Fed's capital rules for commercial banks need to be strengthened by replacing the existing risk-based capital approach with a broader definition of risk and the introduction of contingent capital. (5) Subjecting mortgage lending to a broader range of Federal Reserve regulations and allowing the Fed to deal with nonbank creators of mortgage products would be better than the creation of a new consumer financial protection organization.
- The Federal Reserve System and the Credit Crisis
J. Kevin Corder.
Public administration review, Vol. 69, No. 4, July-Aug 2009, pp. 623-631.
The Federal Reserve System struggled to maintain order in U.S. credit markets as rapid declines in home prices led to huge write-downs in the value of mortgage-backed securities held by financial institutions. The Fed could have taken a number of steps -in the mortgage market or through broader regulatory actions -to either preempt or mitigate the impact of this market disruption. Broader regulatory actions -in the mortgage market, of risk taking by financial institutions, or in the form of actions to limit the contagion of crisis -imply fundamental changes at the Fed. The network of actors with a stake in broader regulatory action is powerful and highly resistant to regulatory scrutiny. The statutory mission of the Fed -especially its commitment to stable prices -could be jeopardized by a broad and explicit mandate to provide liquidity to a wide range of vulnerable financial institutions. Adapted from the source document.
- Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke
Stephen H. Axilrod.
MIT Press, 2009, p. 216
The author, a former Federal Reserve Board insider, offers his perspective on the inner workings of the Federal Reserve System during the last fifty years -- writing about personalities as much as policy. Axilrod's discussion focuses on how the personalities of the various chairmen affected their capacity for leadership. Axilrod also incisively outlines the problems -- including the subprime mess -- inherited from Greenspan by the current chairman, Ben Bernanke. Great leadership in monetary policy, Axilrod says, is determined not by pure economic sophistication but by the ability to push through political and social barriers to achieve a paradigm shift in policy -- and by the courage and bureaucratic moxie to pull it off.
- Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System
Gyung-Ho Jeong, Gary J. Miller and Andrew C. Sobel.
Journal of Law, Economics, and Organization, Vol. 25, No.
2, October 2009, pp. 472-498.
What is the origin of the structural independence of the Federal Reserve System? Unlike existing explanations on central bank independence, we show that the structural independence of the Fed is not the result of intentional design but a product of compromise among disparate groups. Using agenda-constrained ideal point estimation techniques to estimate both the preferences of senators on key questions of Fed structure and the locations of alternative forms of the bill with respect to those preferences, we show that the structural features of the Fed in the final bill differed markedly from the original preferences of legislators representing competing groups. The result was a compromise that offered the prospect of significant independence for the new agency. The Fed case shows that political compromise can provide useful bureaucratic insulation when the short-term incentives of political principals promote unstable, self-seeking policy choices.
- No Single Definition of Central Bank Independence Is Right for All Countries
Pierre L. Siklos.
European Journal of Political Economy, Vol. 24, No. 4, December
2008, pp. 802-816.
A new international data set covering over 100 countries for the period 1990-2004 is used to investigate the relationship between central bank independence (CBI) and inflation. CBI is a combination of de jure and de facto characteristics. No single mix of characteristics uniquely defines CBI. Consequently, no single definition of CBI is 'right' for all countries. The distribution of inflation around the world is concentrated in the tails. Hence, quantile regressions are estimated to investigate the role of CBI. We do find strong evidence that several core elements of what can be defined as CBI do reduce inflation.
- Federal Reserve Transparency: The More Things Change, the More They Stay the Same? Editorial Commentary
Rob Roy Mcgregor.
Public Choice, Vol. 133, No. 3-4, December 2007, pp. 269-273.
The calculus of electoral politics and the central bank's bureaucratic objectives can explain the recent trend toward greater Federal Reserve transparency and can shed light on the likelihood that this trend will continue. If incumbent politicians see no electoral advantage in pressuring the Fed to become still more transparent, and if the Fed sees no benefit to greater transparency, then further changes in current practice are unlikely. Private sector agents will continue to face a significant degree of uncertainty about the Fed's policy objectives and about the information that policymakers consider in the monetary policy decision process.
- The making of US monetary policy: Central bank transparency and the neoliberal dilemma
Greta R. Krippner.
Theory and Society, Vol. 36, No. 6, Dec. 2007, pp. 477-513.
This article explores the implications of the Federal Reserve's shift to transparency for recent debates about neoliberalism and neoliberal policymaking. I argue that the evolution of US monetary policy represents a specific instance of what I term the 'neoliberal dilemma.' In the context of generally deteriorating economic conditions, policymakers are anxious to escape responsibility for economic outcomes, and yet markets require regulation to function in capitalist economies (Polanyi 2001). How policymakers negotiate these contradictory imperatives involves a continual process of institutional innovation in which functions are transferred to markets, but under the close control of the state. Thus, under transparency, Federal Reserve officials discovered innovations in the policy process that enabled 'markets to do the Fed's work for it.' These innovations enlisted market mechanisms, but did not represent a retreat from the state's active role in managing the economy. Adapted from the source document.
- 'Independence' and the Founding of the Federal Reserve
Scottish Journal of Political Economy, Vol. 50, No. 3, August
2003, pp. 297-310.
The Federal Reserve is "independent", but contrary to opinions often expressed, it was not intended by its creators to be free from political control, although others involved in the debate over its establishment hoped that it would be. "Independence" was independence from banking interests, not government. A gradual development of independence preceded a much greater acquisition of power during the Reagan Presidency. The lessons of history include the fact that with few changes in the Federal Reserve Act, its position in the American government has been dramatically transformed. Consequently, contrary to common practice in the economics literature, the "independence" (from government) of a central bank evidently cannot be measured by tabulating characteristics of its statutes.
- Congress as principal: exploring bicameral differences in agent oversight
Andrew J. Taylor.
Congress and the Presidency, Vol. 28, No. 2, Autumn 2001, pp. 141-159.
Compares effort and effectiveness of House and Senate oversight methods, using example of the Federal Reserve; argues that the Senate is not necessarily more effective than the House; 1965-98, chiefly.
- First Branch, or Root? The Congress, the President, and the Federal Reserve
Irwin Morris and Michael Munger.
Public Choice, Vol. 96, No. 3-4, September 1998, pp. 363-380.
Much of the literature on the power of elected officials and bureaucratic agencies argues, from an empirical perspective, that bureaus appears to exercise autonomy. In this paper, a theoretical model sets out the conditions under which the Congress, the President, and one agency (the authors use the U.S. Federal Reserve as an extended example) can dictate policy outcomes. The results of the paper include the 'Congressional Dominance' theorem: If more than 2/3 of House members, and more than 2/3 of Senate members, agree on something, they get it. The theorem is obvious (the 'proof' is in the U.S. Constitution), but often forgotten in the substantive literature. More realistic results are derived for situations where the preferences of members of Congress are more diverse. Powers of the President to influence policy with, and without, appointments are also analyzed.