Restoring the Federal “Reserve”

[Comment originally posted at <a href=”;utm_medium=feed&amp;utm_campaign=Feed%3A+typepad%2FRUQt+%28macroblog%29″>Macroblog regarding “When Independence Begets Accountability”</a> ]

The Federal Reserve should get back to its traditional role as quickly as possible, and cease trading in markets for anything other than full-faith-and-credit obligations of the United States. This includes Fannie/Freddie debt!

The more complex role that the Fed has taken on in the past 1-2 years is too politically charged, and should be abandoned. There are many other ways that the government can react to a financial crisis. If the Fed’s retreat creates a gap in the policy options, put that issue on the table. But don’t put the Fed into the gap.

The Fed should pull back from the “regulatory” roles that it’s supposed to have. That hasn’t worked out properly, and it overly entangles the Fed with the banks. The Fed was so entangled that it couldn’t take away the punch bowl at the right time. If the Fed cannot do that well, it certainly cannot afford to take the blame for failing. Let someone else have that job, but protect what is essential about the Fed.

The Fed should not be an agency of anything other than pure monetary policy. It should simply manage the elastic money supply.

The Fed should be made far more independent of the banks that it interacts with. The only way to be able to take away the punch bowl is not to be drinking at it, and not to be buddies with the drinkers either.

It’s time to restore some honor and dignity to the system.

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