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What Powers for the Federal Reserve?

  • Martin Feldstein
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    In this essay, I explain my reasons for the following policy recommendations: (1) The Fed should continue to manage monetary policy as it has in the past, should act as the nation's lender of last resort, should fully supervise the large bank holding companies and their subsidiary banks, and should be given resolution authority over the institutions that it supervises. (2) While a council of supervisors and regulators can play a useful role in dealing with macro prudential risks, it should not replace the central role of the Federal Reserve. (3) The virtually unlimited lending powers that the Fed has recently exercised in creating credit and helping individual institutions should be restricted in duration and subjected to formal Treasury approval backed by Congressional preauthorization of funds. (4) The Fed's capital rules for commercial banks need to be strengthened by replacing the existing risk-based capital approach with a broader definition of risk and the introduction of contingent capital. (5) Subjecting mortgage lending to a broader range of Federal Reserve regulations and allowing the Fed to deal with nonbank creators of mortgage products would be better than the creation of a new consumer financial protection organization. (JEL E52, E58, G21, G28)

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    Article provided by American Economic Association in its journal Journal of Economic Literature.

    Volume (Year): 48 (2010)
    Issue (Month): 1 (March)
    Pages: 134-145

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    Handle: RePEc:aea:jeclit:v:48:y:2010:i:1:p:134-145
    Note: DOI: 10.1257/jel.48.1.134
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