Regulatory Reform and the Federal Reserve

Thank you for the opportunity to present my appraisal of the administration's proposal for regulatory changes. I will confine most of my comments to the role of the Federal Reserve as a systemic regulator and will offer an alternative proposal. I share the belief that change is needed and long delayed, but appropriate change must protect the public, not bankers.

During much of the past 15 years, I have written three volumes entitled A History of the Federal Reserve. Working with two assistants we have read virtually all of the minutes of the Board of Governors, the Federal Open Market Committee, and the Directors of the Federal Reserve Bank of New York. We have also read many of the staff papers and internal memos supporting decisions. I speak from that perspective.

Two findings are very relevant to the role of the Federal Reserve. First, I do not know of any clear examples in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures. We know that the Federal Reserve did nothing about thrift industry failures in the 1980s. Thrift failures cost taxpayers $ 150 billion. AIG, Fannie and Freddie will be much more costly. Of course, the Fed did not have responsibility for the thrift industry, but many thrift failures posed a threat to the financial system that the Fed should have tried to mitigate. The disastrous outcome was not a mystery that appeared without warning. Peter Wallison, Alan Greenspan, Bill Poole, Senator Shelby and others warned about the excessive risks taken by Fannie and Freddie, but Congress failed to legislate. Why should anyone expect a systemic risk regulator to get requisite Congressional action under similar circumstances? Can you expect the Federal Reserve as systemic risk regulator to close Fannie and Freddie after Congress declines to act?

Click here to read the full testimony as an Adobe Acrobat PDF.

Allan H. Meltzer is a visiting scholar at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Allan H.
Meltzer

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI on Facebook
Events Calendar
  • 28
    MON
  • 29
    TUE
  • 30
    WED
  • 31
    THU
  • 01
    FRI
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.