Economics and Politics

There are three important bills currently going through Congress that have the potential to change America's economic landscape. The first and most dangerous bill is Ron Paul's attempt to insert Congress into monetary decisions! In its current state the Federal Reserve can change the money supply at a moments notice with no political intervention. Paul proposes creating a new Congressional committee that will have the ability to examine all monetary decisions, effectively placing Congress on the FOMC's doorstep. This is a very dangerous idea. Monetary theory is very complex and Congressmen do not have the expertise to improve upon the current process. For example, in front of the Esteemed Chairman himself Paul said that the definition of inflation was an increase in the money supply!! Furthermore, Congressmen have different incentives than members of the Federal Reserve. If you know you have to be re-elected in two years or six years you will change the money supply with every ebb and flow of the market! Paul is being moved to the top of the Bernanke Arch-Nemesis List for this stupid legislation.

The next two bills are related. Barney Frank presented a bill to the House and Chris Dodd a bill to the Senate that will change how the Federal Reserve supervises banks. These are competing bills and the final legislation will be somewhere in between each of them. The BBFiles supports the Frank bill. Both bills strips the Federal Reserve of its Consumer Protection agency and creates a new CPA that will probably be led by Elizabeth Warren. Next, and more importantly, the Frank bill gives the Federal Reserve more tools to supervise the financial system. It does this by allowing the Federal Reserve Board of Governors to take-over ANY systemically important institution EVEN IF IT IS NOT NECESSARILY A BANK! (Think AIG and FannieMae). This is obviously controversial and there should be efficient constraints that restrict the Fed from becoming uber-aggressive. But, the current system is wholly inefficient and should be changed ASAP. The takeover process would be almost identical to what the FDIC does when it takes over a bank! This process will be funded by large financial institutions that will have to pay a fee as they get larger. There are many repercussions that could occur from this bill but they will not be discussed here.

The Dodd plan is quite drastic. It strips the Federal Reserve of all bank supervision authority and creates a new agency that will be in charge of regulating all financial institutions. The BBFiles is not inheritently against this, but there are several reasons we believe this is not a good plan. First, it assumes that the new agency will be able to supervise the financial system. Agencies such as the SEC, FDIC, CFTC and FHA were not more or less effective than the Federal Reserve. Next, it is important to understand that there are several things that make the Federal Reserve as efficient as it is, and the biggest factor is the relationship it has maintained with every important financial system in the world! Bernanke can go to any European regulator, Chinese bank, South American bank or Wall St CEO and gain an audience that will seriously consider what he has to say. There is no way an agency that is politically created and ran could do this! The Federal Reserve agrees that regulation reform is needed, but it has said this for years. Dodd's plan is too drastic and should be withdrawn from the Senate.