With Republicans soon to hold majorities in the House and Senate, many commentators are speculating that the Federal Reserve will receive much more critical attention in 2015. In September, a large bipartisan majority in the House passed a bill to have the Government Accountability Office audit the Fed’s activities, including its monetary policies. The bill went nowhere thanks to Senate Majority Leader Harry Reid , but it could have significant support in next year’s Republican Senate.
Fed Chair Janet Yellen has expressed a legitimate fear that the Federal Reserve Transparency Act would endanger the Fed’s independence on monetary matters. But the Fed has now accumulated so much regulatory power that it can no longer claim the right to avoid congressional oversight. If the central bank hopes to maintain its monetary independence over time, it will have to surrender its regulatory authority.
There are serious potential conflicts of interest between the Fed’s regulatory and monetary roles. This became clear during the financial crisis, when the central bank used its existing authority under the Federal Reserve Act to provide assistance to financial institutions that were having liquidity problems. Many of these firms—bank holding companies, banks and their nonbank subsidiaries—are regulated directly or indirectly by the Fed. Their failure could have been seen as regulatory failure by the Fed. Did the Fed provide financial assistance to avoid this criticism, or because it was best for the economy and the financial system? It’s a painful question to consider, but the fact that it can legitimately be asked suggests the problem—and a reason why the Fed should not have both monetary and regulatory powers.
justiceleague00
Justice League 