Willem Buiter, Professor at the London School of Economics and Political Science, has a great critique of the Federal Reserve over at the Financial Times. Buiter says the Obama administration’s plans to enhance the Fed’s powers and turn it into the country’s systemic risk regulator spells trouble……. BIG TROUBLE. He writes:
If the same institution, the central bank, has to be in charge of both normal monetary policy and systemic risk regulation (albeit jointly with the Treasury for the systemic risk role), there is no elegant, first-best solution. Either monetary policy will be driven by politicians whose macroeconomics is limited to a partial understanding of the Keynesian cross and whose monetary policy views can be summarized by the proposition that the have never seen an official policy rate so low they would not want it even lower, or the central bank continues to act as an off-budget, off-balance sheet special purpose vehicle of the Treasury.
Buiter isn’t the only one calling for greater independence at the Fed. Over 350 economists signed a petition, which was sent to Congress today, urging lawmakers to “reaffirm their support for and defend the independence of the Federal Reserve System.”
