President Barack Obama is using the financial crisis to give the Federal Reserve more power. Crises have often provided unscrupulous governments with opportunities to implement bad policies. And, to paraphrase the White House Chief of Staff Rahm Emmanuel, the Obama administration will not let this crisis go to waste.
Of course, the Obama administration is assuring Americans that the proposed regulatory changes are designed to protect the people by preventing another financial crisis. But Mr. Obama is not interested in the cause of the crisis. Instead, the administration prefers to round up and punish the usual suspects of populist governments: Wall Street and free markets. The administration’s policy is based on socialist rhetoric: When oil prices rise, blame it on Exxon; when the economy falters, blame it on free markets.
Worse for American sovereignty, there is evidence that the Obama administration is thinking of harmonizing U.S. financial regulations with those of other countries, including Russia and China. It seems that Mr. Obama has not forgotten the internationalism in which candidate Obama relished so much during the presidential campaign.
Even if Mr. Obama does not integrate U.S. financial regulations with those of centralist Europe, Putinesque Russia and Leninist China, the administration’s approach to the crisis is so woefully myopic that it cannot lead to constructive reforms. Indeed, the Obama administration continues to disregard the Fed's glaring and catastrophic errors.
For years, and well before the crisis began in earnest, a large number of monetary economists argued that the Fed’s mismanagement of interest rates would cause serious misallocations of resources, impact risk assessment and investment behavior, and severely damage the economy. Former Chairman Alan Greenspan retroactively buttressed that view in his book The Age of Turbulence. Describing the attitude of the Federal Open Market Committee towards inflation, Mr. Greenspan wrote, “We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address...”
Mr. Greenspan thus admitted in his memoir, that the Federal Reserve fostered the “bubble” that wrecked financial markets. The Fed knowingly inflated the biggest bubble in history… trillions of dollars of misallocated, and ultimately, wasted capital.
Yet, against this canvas of acknowledged Fed failures, Mr. Obama’s reforms are focused on reigning in Wall Street and on regulating markets. Most significantly, in a dogmatic or delusional policy-making effort, Mr. Obama proposes to reward failures by giving the Fed more power.
Indeed, on the heel of such admission by Mr. Greenspan, once viewed as the best central banker in history, the Obama administration plans to put the Fed in charge of regulating financial markets in addition to conducting monetary policy. That is wrongheaded and irresponsible. It makes a mockery of regulatory reform and, humorously, reduces to insignificant euphemism the expression “putting the fox in charge of the hen house.” By entrusting financial markets to the Fed, Mr. Obama is not just putting the fox in charge of the hen house but he is putting a voracious and unaccountable fox in charge of it.
While economics is often referred to as the dismal science, it is not as dismal as it once was. In fact, when it comes to monetary policies, economics has achieved a quasi-scientific ability to evaluate policies. In November 2008, Professor John B. Taylor, professor of economics at Stanford University and senior fellow at the Hoover Institution, published the only empirical analysis of the financial crisis (http://www.stanford.edu/~johntayl/FCPR.pdf). Mr. Taylor demonstrated that the Fed’s interest-rate policy set the stage for the crisis. The other abuses, including poor lending practices encouraged by the U.S. government and extensive securitization of mortgages executed by Wall Street also played a role but their respective impacts were dwarfed by Fed actions.
Federal Reserve monetary policies caused the financial crisis, which has weakened the United States, economically and politically. In addition, the Fed played a key role in the debasement of the U.S. dollar. The Fed, thus, is responsible for the two greatest financial crises in U.S. history: the Great Depression and the current crisis. Clearly, the Fed’s power ought to be curtailed, not expanded. But this is a crisis. It is a time for opportunistic politicians to increase their power by claiming to protect the people from whom they take that power. Mr. Obama is increasing the Fed’s power to hurt Americans while arguing that the changes are made for the protection of Americans.
In 1933, in the midst of a crisis—the Reichstag fire— German President Paul von Hindenburg issued a notorious decree for “the Protection of the People.” As a result, the German state achieved supremacy through the subordination of its citizens. The moral of history is simple: Those who claim to protect the people usually make governments bigger and the people smaller.
If Americans are suspicious of big governments, they ought to be very weary of Mr. Obama’s plans. Perhaps this is what the opinion polls are showing.
-Joseph Beaudoin holds degrees in economics and finance, and worked in the banking and investment industries for 20 years. He is a regular contributor to Reflections.
