Regulatory Reform and the Federal Reserve

Thank you for the opportunity to present my appraisal of the administration's proposal for regulatory changes. I will confine most of my comments to the role of the Federal Reserve as a systemic regulator and will offer an alternative proposal. I share the belief that change is needed and long delayed, but appropriate change must protect the public, not bankers.

During much of the past 15 years, I have written three volumes entitled A History of the Federal Reserve. Working with two assistants we have read virtually all of the minutes of the Board of Governors, the Federal Open Market Committee, and the Directors of the Federal Reserve Bank of New York. We have also read many of the staff papers and internal memos supporting decisions. I speak from that perspective.

Two findings are very relevant to the role of the Federal Reserve. First, I do not know of any clear examples in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures. We know that the Federal Reserve did nothing about thrift industry failures in the 1980s. Thrift failures cost taxpayers $ 150 billion. AIG, Fannie and Freddie will be much more costly. Of course, the Fed did not have responsibility for the thrift industry, but many thrift failures posed a threat to the financial system that the Fed should have tried to mitigate. The disastrous outcome was not a mystery that appeared without warning. Peter Wallison, Alan Greenspan, Bill Poole, Senator Shelby and others warned about the excessive risks taken by Fannie and Freddie, but Congress failed to legislate. Why should anyone expect a systemic risk regulator to get requisite Congressional action under similar circumstances? Can you expect the Federal Reserve as systemic risk regulator to close Fannie and Freddie after Congress declines to act?

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Allan H. Meltzer is a visiting scholar at AEI.

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About the Author

 

Allan H.
Meltzer
  • Allan H. Meltzer is the Allan H. Meltzer University Professor of Political Economy at Carnegie Mellon University. He is the author of History of the Federal Reserve, Volume I: 1913-1951 (University of Chicago Press, 2002), a definitive research work on the Federal Reserve System. He has been a member of the President's Economic Policy Advisory Board, an acting member of the President's Council of Economic Advisers, and a consultant to the U.S. Treasury Department and the Board of Governors of the Federal Reserve System. In 1999 and 2000, he served as the chairman of the International Financial Institution Advisory Commission, which was appointed by Congress to review the role of the International Monetary Fund, the World Bank, and other institutions. The author of several books and numerous papers on economic theory and policy, Mr. Meltzer is also a founder of the Shadow Open Market Committee.
  • Phone: 4122682282
    Email: ameltzer@aei.org

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