The evolution of the financial crisis in the last 2 years is congealing consensus around both a more efficient regulatory structure and the corresponding institutional structure to overhaul government regulations and institutions pertaining to the financial markets. The ongoing debate is healthy and collegial and has matured from the status quo mindset of the ‘90s of an outright rejection of the need for any reforms to the acceptance of at least having to reform the Government Sponsored Enterprises (GSEs) during the Bush years.
The agony of economic reality, not merely in the last couple of years but for the foreseeable future if nothing is done, has opened up the economic establishment from the academics in Boston to the policymakers in Washington to reforming the Washington Consensus itself, unlike the necessary but not sufficient transparency reforms the International Monetary Fund (IMF) went through after the Asian Crisis about a decade ago. Then it was the IMF’s fault and the United States was perfect. Now, the United States must change, if not for the IMF, for its own sake because the health of the republic is at risk.
Senators Dodd and Shelby deserve kudos for their extraordinary sensibility, along with their colleagues on the Senate Committee on Banking, Housing and Urban Affairs for taking their sworn obligation to oversee the Fed (and its relationship with the Treasury) seriously. And so do representatives Barney Frank and Ron Paul. The Congress has acted to making financial regulatory reform happen by getting the ball rolling in the right direction in spite of the usual interest group politics in Washington to dilute any and all serious change for the better. There is room for sensible compromise among all the stakeholders, including the interest groups, but the moment to get it all done right is now, not gradually over time.
Representative Paul is correct in that the Fed is not necessary as a separate institution. It had not come into being until 1913 but the country grew rapidly as an industrial power without it, with the Fed’s star rising because of the two world wars after its founding by President Wilson and the Congress. What is indispensable is sound money and the lessons in the nearly 100 years since the Fed’s founding can ensure that that is feasible without the Fed. It can be done by the Treasury using an explicit numerical inflation targeting range written into law and changeable with the explicit consent of the Congress when circumstances warrant, but within reason.
The financial markets have also evolved considerably since the Great Crash of 1929. It is the government that needs to do the catching up. The alphabet soup of government agencies overseeing the rapidly expanding activities of U.S financial markets since FDR can all be streamlined and consolidated under the Treasury to both enforce regulations and do data collection and analysis that monetary policy needs to do its job more thoroughly. There is no reason why any financial instrument must be traded outside of exchanges in the markets and no reason why private financial institutions should not countercyclically save for a rainy day with the government in lieu of Basel. Both these legislative changes will greatly enhance the transparency of the financial markets.
The world of Obama and his Facebook presidency is technologically a far cry from the fireside chats of FDR. Since the advent of plastic, more Americans today do not need hard cash either in their wallets or jingling in their pockets. It is time for the United States to move to a more robust electronic currency and payments system to more effectively complement the financial surveillance function of the Treasury.
The consolidation of financial regulatory policy and all macroeconomic policy instruments by adding monetary policy to the current responsibilities of the Treasury for budgets, taxes and trade will enable more transparent economic policymaking and make it more accountable and time consistent through the constitutional checks and balances of the separation of powers, besides ensuring strategic coherence (which is now the job of the National Economic Council in the White House). Economic forecasts made for the purposes of monetary policy could then be made available to the public in real time for them to be debated and vetted by policymakers, academics, press and the people in a manner no different from how the Congress currently makes legislation or the Executive branch formulates and implements policies.
It may seem on the surface that such a massive consolidation of government institutions and functions can be very disruptive. The reality is that it changes none of the current routine bureaucratic operations of any of the government agencies involved. The council of regulators being considered by the Senate to be led by the Secretary of the Treasury would be a good start to begin that consolidation at the level of the decision makers to change bureaucratic processes to conform to the new legislation, without either the need to move personnel or remake facilities. The consolidation process must be subject to a timeline presented by the council to the Congress and preferably completed by December 2013, the 100th anniversary of the Federal Reserve.