The "Blueprint" for a disaster

On March 31, the US Treasury Department announced a plan to overhaul the regulatory structure of US financial markets. A detailed description of the plan (called the "Blueprint") can be found here. One of main features of the plan is that it shifts a significant amount of regulatory authority from various government agencies and concentrates them in the Federal Reserve. In addition, the plan would give additional regulatory authority to the Federal Reserve. While the goal of streamlining the regulatory process is admirable, adding additional regulatory oversight to the government has significant risks. Unfortunately, the single most important problem with the plan is the goal of transferring regulatory authority to the Federal Reserve.

The Federal Reserve is an independent central bank that is not part of the Executive Branch.¹ While it receives some oversight from Congress, there is little that Congress can do to the Federal Reserve other than passing legislation. This approach is meant to minimize the effect of politics on monetary policy. Minimizing political effects on monetary policy is valuable, since it provides for a much more stable banking system. Unfortunately, regulation is a different activity. How regulation is applied is often an inherently political activity. If the voters want to force a change on how the Federal Reserve regulates the markets, they do not have the capability to vote for new members of the Board of Governors. Instead, voters would have to petition Congress to write new legislation - and hope that the Federal Reserve properly implements it.

Regulation of the financial markets should remain within the confines of the Executive Branch, based on clear legislation provided by Congress. Concentrating significant regulatory power in an organization that is not directly answerable to the citizens of the United States is a recipe for disaster.