Tags: Fed | policy | Taylor | rule

Senate Banking Committee Pursues Fed Reform

By    |   Wednesday, 04 March 2015 08:22 AM

The Senate Banking Committee, chaired by Sen. Richard Shelby, R-Ala., held a hearing March 3 titles "Federal Reserve Accountability and Reform." In his opening statement, Shelby explained that this hearing would continue an inquiry into ways to reform the Fed that began with the testimony of Federal Reserve Chairman Janet Yellen the previous week.

Shelby stated that greater accountability is needed for the Fed since it has expanded its balance sheet by $4.5 billion that it has not begun to unwind, held interest rates near zero for more than six years and acquired regulatory authority over virtually every aspect of the financial system. Last week he referred to the Fed as a "super-regulator."

As stated in previous articles, this writer's perspective is that the financial crisis dates back as many as five decades. The witnesses at this hearing have studied this history enough to help inform the committee's inquiry. Stanford economist John Taylor and Carnegie-Mellon economist Allan Meltzer are two of the giants of monetary policy scholarship. Taylor repeatedly sought to assure the committee that the Taylor Rule embodied in a House proposal would not constrain the Fed but would actually bolster the Fed's independence and that Yellen had once endorsed features of the rule as helpful to the Fed's communication of monetary policy.

Meltzer endorsed the Taylor proposal and stated that when put into effect by former Fed Chairman Alan Greenspan it produced the longest uninterrupted period of monetary stability in the nation's history. He blamed the Fed's departure from this policy for contributing to the subsequent crisis episode. Meltzer also faulted the Fed for scrapping the longstanding policy of trading only in Treasury bills in order to avoid distorting and ultimately dominating the bond market. He endorsed the Brown-Vitter bill that calls for higher capital standards for "too big to fail" banks. He faulted the Fed's failure to regulate capital in the run-up to the crisis and complained that it has become a more political institution during crises.

Paul Kupiec, a resident scholar at the American Enterprise Institute, complained that one of the results of the Dodd-Frank Act has been to give more discretion to regulators and less to the financial industry.

Peter Conti-Brown, an academic fellow at Stanford Law School, the Democratic witness, testified that he favored emphasizing reform of the Fed's structure, particularly the Federal Reserve Bank of New York, over monetary policy reform. He has called for its president to be appointed by the president and confirmed by the Senate. As many critics, including this writer, have scoffed at repeated assurances by regulators that the biggest banks are much better capitalized than they were before the 2008 crisis, Conti-Brown quipped that three times very little capital is still very little capital.

As a Fed historian, Conti-Brown advised that Fed policy tends to become sticky because banking law reflects compromises made decades ago. This writer would suggest an amendment that policy can be sticky or slippery in response to the Fed's own agenda and client interests.

(Archived video and witness statements can be found here. Shelby's opening statement can be found here.)

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The Senate Banking Committee, chaired by Sen. Richard Shelby, R-Ala., held a hearing March 3 titles "Federal Reserve Accountability and Reform."
Fed, policy, Taylor, rule
Wednesday, 04 March 2015 08:22 AM
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