Central banks play a critical role in meeting the needs of a country’s economic and financial system. They have the ability to affect the flow of money, amount of credit, and interest rate, all of which directly impact aggregate output, inflation, and the financial market. The Federal Reserve System is the United States’ central bank designed to address the monetary issues plaguing the country prior to 1913. The Federal Reserve System’s unique structure is comprised of three parts: The Board of Governors, twelve regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC). Firstly, the Board of Governors consist of seven members appointed by the President to serve a 14-year term. Each of the twelve regional banks has a nine-member board composed of representatives, six of whom are chosen by commercial banks. Finally, the FOMC is the monetary policymaking body of the Federal Reserve System. It is comprised of seven members from the Board of Governors and a rotating group of five reserve bank presidents. I believe any ongoing economic problems should only be blamed on the people working in the Federal Reserve and not because of its decentralized structure.
Much of the current economic crisis we are seeing can be attributed to the mishandling of the Fed under the watchful eye of the then-chairman Alan Greenspan. Common criticism often suggests the Federal Reserve to be partially responsible for creating the housing bubble prior to the 2007 recession. The housing crisis originated from the flaws displayed by the Federal Reserve’s Chair. The Fed was under Alan Greenspan, who was appointed as Chair of the Board of Governors in 1987. As a firm believer in anti-regulation and libertarian ideals, Greenspan dismissed multiple warnings, failed to regulate mortgage companies, and resisted controlling the housing bubble. Greenspan may have initially believed that lowering the interest rates would prevent the United States from slipping into another recession, but he could not have predicted the number of companies engaged in risky and fraudulent mortgage lending. Greenspan left the Fed in 2006 only to come back two years later to explain his actions in front of Congress. “You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said the chairman of the committee, Henry Waxman. Waxman then asks him, “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” At last, Greenspan admits some error on his part in his belief that firms were capable of policing themselves through protecting their own shareholders and equity. Nothing was more evident than Greenspan’s flawed assumptions and stubbornness that resulted in the irreparable harm of the US economy.
One remedy I propose is for more accountability to the American people. Greenspan’s “I didn’t know” excuse is not sufficient enough especially in his role during the housing crisis. The culmination of lost output according to lostoutputclock.com estimates it to over five trillion dollars in lost jobs, foreclosures, and related woes. A change to the Federal Reserve Chair’s job contract is the inclusion of involuntary termination. If Greenspan knew his job was on the line, then he would not have taken the task of running the Fed so lightly. The uncertainty of his job term may not have provided him enough incentive to perform better but it will remind him that a grave mistake will cost him a job. His refusal to regulate the fraudulent activity during the Subprime mortgage crisis can be considered maleficent and qualifies him for removal from his position at the Fed. There should be an unbiased organization inside the government but free from any external corruption that will actively gauge and monitor the employees’ job performance. More scrutiny and closer examinations will fall on the Chair because of the influence and power he or she have over the Fed. This organization will have its own committee who will vote whether to terminate the current Chair for underperforming and is responsible for selecting the next Chair.
Another remedy is the implementation for more transparency inside the Fed. Any discussions of revising monetary policy should be transcribed. Any findings or results from forecasting should also be made public. All this information should be outlined and detailed on the Federal Reserve’s government website. This transparency will provide the public with some insight and align the public’s expectations with the goals of the Federal Reserve’s.
Changes to these policies can only be as effective as the people working in the Fed. If we have another Chair who displays the same reluctance and ignorance of Greenspan, then any fundamental changes we want to make is pointless if the change cannot happen on the human level.