Wednesday, August 31, 2011

The Fed: what's inside counts, too

So I was reading through this Felix Salmon post about newfangled cash transfer systems, and a bit near the end caught my eye:
[I]t’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.
Now maybe it's just me, but this seems like a much bigger, more important point than anything to do with payment systems. And I'll admit it's something I haven't really thought about before. He's right: when we talk about "the Fed," we think of a monolithic entity directing monetary policy from behind closed doors. But "the Fed" is just shorthand for "the Federal Reserve System." That's important to remember when you're trying to explain why it has or has not chosen to take a certain course.

Often, lately, the course taken by the Fed(eral Reserve System) has been "timidity." Which makes sense, really. Dispersal of authority doesn't typically lead to strong, forward-thinking leadership. Bernanke isn't the King of the Federal Reserve, he's the Chairman of the Board, and it's not hard to wonder how that changes his approach to issues like payments... and everything else. When you're talking about a committee of just seven people, psychology matters.

Congress has granted the Federal Reserve broad responsibilities and broad authority. It is subject to few external limitations when pursuing its many mandates. But might it face internal limitations that prevent it from exercising the full scope of its authority? Just as importantly, how would we know?

If the Fed's structure inhibits it from directing something important and obvious like the implementation of a national payment system, what else does its structure inhibit it from doing? Considering the Fed's centrality to the US economy, this seems like something we should figure out.

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