STANFORD, Calif. —The nomination of new members to the U.S. Federal Reserve Board offers an opportunity for Americans—and Congress—to reflect on the world’s most important central bank and where it is going.
Promises forgotten In 2008, the U.S. government made a consequential decision: Financial institutions could continue to get the money they use to make risky investments largely by selling run-prone short-term debt, but a new army of regulators would judge the riskiness of the institutions’ assets. The hope was that regulators would not miss any more subprime-mortgage-size elephants on banks’ balance sheets.
Later, there was a run on money-market funds. The Fed bailed out money-market funds once again. There is nothing simpler to fix than money-market runs, but the fix never happened. The problem, of course, is the incentives these policies have created. Why bother keeping cash or balance-sheet space to buy on the dip, provide liquidity, or treat a “fire sale” as a “buying opportunity?” The Fed will just front-run you and take away the profit.
The same Fed that missed the subprime-mortgage risks in 2008, the pandemic in 2020, and that now wishes to stress-test “climate risks,” will surely miss the next war, pandemic, sovereign default, or other major disruptive event. Fed regulators aren’t even asking the latter questions.
But regulatory is must
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