Jensen: Federal Reserve needs to make changes

By By Matteo Jensen

By Matteo Jensen

In his masterful novella, Cronica de una Muerte Anunciada, Gabriel García Márquez recreates a compelling tale of small-town murder and intrigue.

The reader quickly learns that twin brothers Pablo and Pedro Vicano have boldly announced their intention to kill Santiago Nasar. Word swiftly spreads throughout the village until all but the victim are aware of the impending danger. However, no one acts to save Santiago, and he is brutally murdered. Pedro and Pablo are clearly guilty of this violent and gruesome act, but the townspeople, who failed to prevent it, also share in the guilt.

In the same manner, the Federal Reserve — its chairman, board of governors, regional bank presidents and all — is complicit in the most recent recession faced by the United States.

The Fed watched as the housing bubble was inflated by its lenient monetary policy. Despite advanced warnings of an overheating market and unsustainable expansion, the Fed failed to hike interest rates and refused to veer from its strict adherence to the supply-side cult and its dubious doctrine of deregulation and limited oversight.

The results have been ruinous. For many Americans, the sky seems to be falling. The foreclosure rate is skyrocketing. Oil is reaching record levels each week. The economy has hemorrhaged hundreds of thousands of jobs. The once almighty dollar is in a kamikaze tailspin that international investors are increasingly doubtful it can pull out of, yet debt continues to mount at record levels. The situation is dire.

Reform of this system is vital to the long-term rejuvenation of the U.S. economy. First and foremost, the Federal Reserve must be given a single target. Currently, the Fed is burdened by two ponderous mandates which often makes the Fed act as if it has dual personalities — and forces it to choose to benefit Wall Street or Main Street. Today’s central banks, unlike the Fed, were created out of compromise, not crisis. It is essential that the Federal Reserve evolves to better serve its constituents (banks) and consumers by targeting inflation.

Second, the Federal Reserve must continuously modernize its structure, making it dynamic and responsive to economic and demographic trends. When the Fed was created, agriculture was of prime importance to the U.S. economy and employed the vast majority of Americans. Today, fewer than 2 percent of Americans earn a living from agricultural production. Similarly, seven decades ago, cities such as Buffalo, N.Y., Cleveland and Detroit were the powerhouses that drove the U.S. economy. The industries they once fostered are in long-term decline. Now these industries have been replaced with the service economy, and those cities have given way to the burgeoning metropolises of Houston, Phoenix and Seattle.

The Federal Reserve should reflect these changes or risk becoming increasingly weak and subject to populist attack. Several of the regional banks at the nation’s interior could easily undergo a round of consolidation while the San Francisco bank could be split to reflect its growing importance in the national economy.

Finally, the Federal Reserve must be given the resources and power to act in a swift and calculated manner to avert crises. This does not require weighty new regulations that make the United States less attractive to investors and starting a business more difficult. Instead, it requires strong commitment to streamlining processes and enhanced dedication to enforcement. Currently there are five overlapping regulatory agencies. These need to be consolidated within the Fed and given greater authority to mandate transparency for any institution under this broad financial umbrella. These agencies need the money and personnel to immediately punish those firms that refuse to comply. All companies that desire the protection of the Federal Reserve against failure must be subject to these requirements to avoid moral hazard. Those who wish to make risky and opaque investments are free to do so at their own risk. The U.S. taxpayer should not be forced to bailout more Bear Stearns.

Americans must demand changes in the structure of the Federal Reserve system. If they fail to act, then they, too, will be guilty when the next crisis occurs.

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