One of the hallmarks of the financial regulation reform bills snaking their way through Congress is the empowerment of the Federal Reserve as an overseer of the country's largest, most important banks. But could giving the Federal Reserve more power actually make it less powerful? This is some interesting conjecture from Harvard economist Jeremy Stein, in an interview with Real Time Economics:
I think it's quite likely we'll have a somewhat different model of central banks a decade from now. I could imagine it would involve broader powers but somewhat less independence. If you think that the Federal Reserve has to be involved in cyclical leverage policy, then it also has to be more deeply involved in supervising the banks. With all those powers, it may be politically harder to sustain complete independence from the government.
Interesting thinking. And there's logic in it, too. After the Federal Reserve swung open its doors and bailed out the housing and financial markets with trillions of easy dollars, Congress came to audit Bernanke, not to praise him. It's politically repugnant for an independent entity like the Federal Reserve to be seen wielding too much power (For an analog, look at the pressure on nominations for the similarly independent Supreme Court to be deferential to precedent, not-activist, etc).
It will be interesting to see if financial regulation hold-outs make something of this when those bills move to the head of the congressional queue. You could imagine a last minute deal about Fed powers involving a quid pro quo between a stronger Fed and a more politically accountable Fed.
Two final points. It should be said that the Federal Reserve -- like the Supreme Court -- only draws scrutiny when it draws attention. For most of the decade, the attention paid to the Fed was a matter of interest rates moving a quarter percent up and and down. With new expanded powers, the Fed should be out of the spotlight for the overwhelming majority of the next decade so long as the banks stay solvent -- ie, the Fed does its job.
Finally, I think that a more politically tethered Fed would be a huge mistake. It's not simply that I find Congress' current incarnation to be a vestigial shell of a political body. Congress isn't terribly good at its own job, which is making law. It's certainly not going to be very good at the Fed's job, which is making monetary policy. The pernicious implications of our electeds using their political positions to jockey for midterm numbers is bad enough on the whole of our economy. For heaven's sake, Congress, keep your fingers off the money supply levers.