Wednesday, July 29, 2015

Fed should give power back to US Treasury, Fed official says

"A body other than the Fed should have the authority to fail these firms," says Third District Fed President Charles Plosser "...No firm should be too big to fail."

Fed should give power back to US Treasury, Fed official says

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The Federal Reserve should yield its life-and-death power over giant financial firms, to the US Treasury, after trying to pick winners and losers in last year's financial crisis, argues Philadelphia Federal Reserve president Charles Plosser, in a Stanford University speech posted here. Highlights: 

"No firm should be too big to fail... A body other than the Fed should have the authority to fail these firms, wipe out shareholders’ stakes in the firm, force uninsured creditors to take haircuts, and unwind the firm in an orderly manner..."

When markets froze last year, "the Fed responded by trying to increase liquidity in several markets through special lending programs. These programs may have had some stabilizing effects on markets and may have lowered some spreads. Yet, without defining in advance a systematic and consistent approach to such lending, these programs also raised uncertainty — in this case, about who would or would not have access" as investors lobbied for the government to finance their favorite stuff cheap.

"In our desire to get financial markets working again, we offered no systematic view as to how and where the Fed would intervene — we lacked a well-communicated systematic approach...

"We strayed into credit allocation that, in my view, should be the purview of fiscal authorities and not the central bank... 

"The Fed and the Treasury should agree that the Treasury will take the non-Treasury assets and non-discount window loans from the Fed’s balance sheet in exchange for Treasury securities.... ensuring that these extraordinary credit policies are under the oversight of the fiscal authority, where such policies rightfully belong....

"Return control of the Fed’s balance sheet to the Fed, so that it can continue to conduct independent monetary policy...  Specify in advance the conditions under which the central bank would serve as a lender of last resort.... independently of interest group pressures... Times of crisis are precisely when sound principles and a systematic approach to policy are most needed."

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About this blog

PhillyDeals posts drafts, transcripts and updates of Joseph N. DiStefano's columns and stories about Philly-area business, which he's been writing since 1989.

DiStefano studied economics, history and a little engineering at Penn and taught writing at St. Joseph's. He has written thousands of columns and articles for the Inquirer, Bloomberg and other media, wrote the book Comcasted, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com, distefano251@gmail.com, 215.854.5194 or 302.652.2004.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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