Fed Chairman Ben Bernanke has written an opinion piece for WashingtonPost.com attacking proposals being supported by Rep Ron Paul and Sen Chris Dodd to strip the Federal Reserve of most of its powers.

He writes “Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision intended to protect monetary policy from short-term political influence.”

Bernanke would naturally defend the organization that he runs, but there is a persuasive case to be made in his favor even if it is a perverse one. Dodd and Paul have not come up with any reasonable alternatives to replace the Fed’s role.

Dodd’s legislation would combine the power and organization of the four major bank regulators into one. The new “super regulator” would control the actions of most financial firms in the United State. Dodd’s proposal has essentially been written on the back of an envelope. He does not address how four politically charged government agencies which the credit crisis proved are each to some extent dysfunctional, can be mashed into a greater whole. The process, even if successful, would take years and they are years when the economy and credit markets are still likely to be in periodic trouble. Dodd wants to rearrange a regulatory system that needs to work well and not be in the midst of a sea change in the way it is organized or run.

Paul’s proposal could create more instability in the financial system than Dodd’s does. Paul wants the Fed to be audited and the results of those audits to be made public. The Fed does keep certain information about its monetary policy work secret, Bernanke writes in the Post “The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.” Paul wants to release data that is sensitive enough that it could cause huge disruptions in capital markets especially if taken out of the context of the Fed’s daily efforts to keep the monetary system stable.

Bernanke is right. The Fed as constituted now may not be perfect, but it has proved itself to be generally competent over a several decades many of which were periods of crisis.

Douglas A. McIntyre

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