Tags: Fed | banks | independent | GWU

Fed's Image Is Burnished at GWU — Part III

By    |   Friday, 20 Dec 2013 06:54 AM

The third panel on the state of the Federal Reserve held at George Washington University (GWU) on Dec. 13 was titled "The Federal Reserve's Balancing Act: Can the Central Bank be both Independent and Accountable to Congress and the Country?"

Five panelists, including a member of the House Financial Services Committee who is not on the Monetary Policy Subcommittee, discussed this topic, and the last panelist was by far the most interesting.

Rep. Jim Himes, D-Conn., endorsed both the GWU project to develop an online course on the Fed and the study Rep. Jeb Hensarling, R-Texas, has announced will be conducted by the House Financial Services Committee.

Himes chided opponents of the bank bailouts on both the left and right for not accepting the fact that monetary policy (and evidently, bank bailout policy) needs to be made "in an uncomfortable way," because it is too sensitive for elected officials who don't fully understand how the financial system works. He expressed hope that the studies will improve this understanding.

Unlike former Vice Chairman Donald Kohn on the previous panel, Himes fingered the loose monetary policy of the Fed at the turn of the 2000s as helping to generate a financial bubble while the regulators sat by.

Former Federal Reserve Governor Susan Phillips, now a professor at GWU, defended the fed as independent and urged Congress to continue to defer to the Fed, on the ground that the Fed needs to have flexibility to respond to crises that present themselves in varying forms.

Al Broaddus, former president of the Federal Reserve Bank of Richmond, elaborated on Phillips' argument, acknowledging that some changes in the structure of the Fed might be in order, but urging Congress to proceed cautiously in changing the balance between Hamiltonian and Jeffersonian principles that has evolved. Broaddus approves of changes such as the centralization of business functions, as the system has adopted a single IT system and has centralized other functions in specific regional Fed banks.

While he recognized that the number of regional Feds could be reduced in the name of efficiency, and the boundaries of the regions might be adjusted, Broaddus insisted that 12 is the right number and that the current structure allows the regional presidents to keep in touch with their constituents.

Sarah Binder, a professor of political science at GWU and a senior fellow at the Brookings Institution, found that there is a tendency to overestimate the significance of Fed independence and to underestimate the role of politics, given that the Fed is a political institution. (The late Robert Weintraub, who conceived the Humphrey-Hawkins Act in an effort to hold the Fed accountable for monetary policy, used to say that if the Fed were not a political institution, it would have been located in Colorado Springs rather than in Washington.)

Peter Conti-Brown, an academic fellow at Stanford University's Rock Center of Corporate Governance, considered the roles of the law, and especially of personalities, in the evolution of the Fed, as it sought to balance private and public interests, as well as centralization versus decentralization.

Conti-Brown accused the Fed of lying to him when it presented him with a mug marking the 100th anniversary of the Fed. In his view, the Fed as we know it was actually founded in 1935, when it was restructured under the leadership of Marriner Eccles, and then again in 1951, under the unwritten "Accord" with the Truman administration that was supposed to relieve the Fed of the obligation to ease the ability of the Treasury to finance the government's debt.

(Archived video can be found here.)

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Robert-Feinberg
The third panel on the state of the Federal Reserve held at George Washington University (GWU) on Dec. 13 was titled "The Federal Reserve's Balancing Act: Can the Central Bank be both Independent and Accountable to Congress and the Country?"
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Friday, 20 Dec 2013 06:54 AM
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