Our co-blogger Steven Kyle, professor of economics at Cornell, weighs in on the news that the Fed secretly loaned billions to banks without the public's knowledge (Steve is indisposed so he emailed me the post):
I am not on the same page as most dems and progressives on this. I think it would be an absolutely terrible idea to make the Fed subject to the political process. Every country that has done that has ended up with inflation because politicians almost never want to raise interest rates. There is a very good reason these kinds of loans are secret - publicity could very well provoke the very runs on the banks they are trying to prevent.More on this in a second post later today.
People dont realize it, but it is the JOB of the Fed to loan money to banks that need it. There is nothing sinister (or at least nothing more so than usual) about the Fed lending money to banks during a financial crisis. Sure, we could all go down the Ron Paul path and imagine that they are doing nefarious things, but believe me we would be far worse off if the Fed let the system melt down. And by the way, it isn't taxpayer money they are loaning out - The Fed is the entity that creates money in the first place.
Having said that it is absolutely true that more regulation is needed. And the Fed (particularly under Greenspan but also under Bernanke to some extent) dropped the ball on doing the regulation they needed to do. But part of the reason for that is that they knew they wouldn't get backing from the political process and also the Repubs tend to put people with an anti-regulatory mindset in these jobs. We are STILL waiting for a real regulation bill to get through Congress. Personally, I dont think one will get through and we are all set up for the next crisis (which will come eventually). Maybe we need a bigger crisis to make it happen.
