The Federal Reserve already has a mission, which isn’t necessarily compatible with this new one it’s hankering for.
In the past two weeks, the Federal Reserve, long the guardian of the nation’s banks, has redefined its role to also become protector and overseer of Wall Street.
With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.
Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.
Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.
“This will redefine the Fed’s role,“ said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. “We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they’ve recreated the financial universe.“ »
Fed Leaders Ponder an Expanded Mission
No. It doesn’t. The Federal Reserve has a very narrowly defined mission that it has done ... not exactly well, but more or less competently.
“Protecting” Wall Street will mean regulating Wall Street, which will bring more and still more politics—especially the brainless, immediate, parochial politics of U.S. elected officials—into the workings of international markets.
Imagine your 401(k) at the mercy of a mid-level aide in Nancy Pelosi’s office, because that recent bottom-quintile Kennedy School graduate has been tasked with the Speaker’s handling (snicker) of global financial policy.
Epochs end by such innocuous but ill-advised, utterly unthought-out actions as the Fed’s Wall Street bailout.
Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street.
That right there tells the story. They acted without thinking, and now they’re going to try to rationalize it and thus lock in for all time the power to act without thinking.
We’ll regret this.
