- - Friday, July 18, 2014


Janet Yellen, the chairman of the Federal Reserve, gave the markets a fright last week. She closed her testimony before Congress with a firm rejection of the notion that the central bank should be subject to monetary policy rules that would get in the way of the central bank’s “independence.”

A number of stocks took a nose-dive. But the lady has a point. The Federal Reserve was designed to be independent of political interference. It was created a century ago with the idea that this would limit pressure to set the printing presses spinning to pay for whatever harebrained ideas the administration of the time wants to spend the people’s money on. The design has been successful, and the United States have been spared the high inflation of so many other nations.

Unfortunately, the Federal Reserve isn’t the central bank it once was. Four years after the passage of the Dodd-Frank act to regulate Wall Street, the Fed has enhanced its extraordinary power over the economy and given itself a new mission. In response to the financial collapse that set off the Great Recession, Dodd-Frank gave the Fed the authority to prevent crises, but the law did nothing to enhance the Fed’s accountability to the public.

Instead of merely deciding questions of monetary policy, the Fed can boss banks, savings and loans associations, securities firms and anything that Ms. Yellen designates as “a systemically important financial institution.” She gets to decide what’s too big to fail but not too big to deserve a taxpayer-funded bailout.

Dodd-Frank’s goal was to centralize power and authority over the markets, and this has had a disastrous impact on the way Wall Street does business. Many firms now work harder to please the regulators than they do to please their shareholders. Banks jump through expensive hoops to prove their financial heft to the Fed, but the Fed doesn’t have to explain its methods or its reasoning. The models on which it bases its regulatory standards remain top secret, its decisions beyond questioning of mortals.

Ms. Yellen has repeatedly proclaimed her admiration of “macroprudential” policy, the jargon invented to describe how the Fed essentially acts as a central planner for the financial system as a whole. Now it’s Wall Street’s nanny. But regulatory agencies must be open in the way they conduct business, to ensure fairness and accountability and to earn the confidence of the taxpayers. The Fed cannot be both a regulator and demand the independence of a central bank.

We would all be better off if the Fed could return to its original mission as a central bank, focused solely on monetary policy. If Ms. Yellen wishes to preserve the Fed’s independence, she should ask Congress to repeal the provisions of Dodd-Frank telling her she should meddle in regulatory affairs. If she wants the trust and confidence of the American people and the marketplace, she should open the Fed’s books.

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