A potent repudiation of the Federal Reserve’s mantra that retention of its bank regulatory responsibilities is crucial to effective, independent monetary policy comes from someone once prominent within the institution.
That’s the toughest kind of criticism to shake off.
Vincent Reinhart, now a resident scholar at the American Enterprise Institute and a former key staffer at the Federal Reserve, rebutted in a Washington Post letter to the editor today the centrality of regulation argument made by Fed Chairman Ben Bernanke and others.
That same newspaper last Sunday carried a Bernanke authored op-ed arguing for Fed banking regulation and against a Senate bill that would end it, as well as for freedom from other reductive Congressional initiatives.
A knack for succinct and cutting argument clearly resides in Reinhart’s tool kit.
“Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.”
He said rate-setting Federal Open Market Committee meeting transcripts (released after five years) don’t reveal a regulation-monetary policy lash-up. “The biggest threat to the Fed’s independence is doubt about its competence,” Reinhart wrote.
