Bill Shughart has a second essay published by The Independent Institute, on the unjustified and dangerous recent expansion of the powers of the Federal Reserve. A selection:
By signing legislation creating Medicare Part D, George W. Bush became
responsible for the most significant expansion of the welfare state
since LBJ’s Great Society. It turns out, though, that forcing taxpayers
to help buy Granny’s meds was the proverbial camel’s nose of big
Republican government. So what was next? The overhaul of financial
market regulation announced recently by Treasury Secretary Henry
Paulson, which, if adopted, would extend the federal government’s reach
more so than any policy initiative since the New Deal.
Intended to prevent recurrence of the turmoil triggered by the
bursting of the housing bubble, the administration proposes to
restructure the responsibilities of the agencies who now oversee U.S.
financial market operations, in ways that supposedly would promote
regulatory information-sharing, cooperation and coordination.
In an earlier crisis atmosphere, similar goals justified cobbling
together the Brobdingnagian Department of Homeland Security, which just
goes to show that, while interagency information-sharing and
coordination sound good in theory, they are unlikely to be achieved in
actual bureaucratic practice.
But the most troubling aspects of the Treasury’s blueprint for
reforming financial market regulation are found in the far greater
powers it assigns to the Federal Reserve.
One part of the plan simply affirms actions the Fed already has taken.
Apparently concluding that Bear Stearns was too big to be allowed to
fail, the Fed, for the first time in its history, granted to such non-bank
financial institutions access to loans at its "discount window" — loans
previously restricted to commercial banks — and guaranteed $29 billion
in illiquid assets to broker Stearns’s purchase by JPMorgan Chase.
So now that the Fed has lent those billions more to Goldman Sachs,
Lehman Brothers, Morgan Stanley, and other Wall Street securities’
brokers, the Treasury proposal would permit the central bank to conduct
on-site inspections and impose conditions, including capital
requirements, on such borrowers — which it now is doing without
And most worrisome, the regulatory reform plan also empowers the Fed
to ensure "market stability," watching for threats originating anywhere
within the financial system, be it from commercial banks, investment
banks, mortgage lenders, hedge funds or insurance companies.
As economists have asked: if smart, highly paid Wall Street
investment bankers with huge financial positions on the line failed to
foresee the risk to which subprime mortgages exposed them, how can one
expect a regulatory agency to do so? And, what steps will the central
bank take to "stabilize" markets, if it does perceive a threat? Will it
continue to bail out institutions who run into financial trouble?