David Ignatius' Reflexive Fear of Changing The Status Quo.

David Ignatius writes a column about how Chris Dodd's financial regulation plan is attacking the Fed's political independence, but mostly it just shows that Ignatius doesn't understand the Fed -- he seems to be confusing its role as a bank regulator with its job setting monetary policy, and doesn't seem to even understand the need for financial regulatory reform. As Kevin Drum correctly points out, none of what Dodd is suggesting would endanger the Fed's independence; in fact, Dodd's plan would make the Fed more independent by lessening the influence of major banks on the institution. Now, unless you are pretending that the financial industry doesn't have political interests, it seems pretty obvious that this is, as Drum observes, making the Fed a more independent institution.

The bigger problem here is that Ignatius is arguing in favor of the status quo not because he thinks it's good, but because he can't seem to tell the difference between Goldbug Fed Bashers of the libertarian ilk and people like Dodd and Barney Frank who want a financial system that doesn't need to be reset with billions of dollars of public money every few years. Ignatius starts throwing out words like "Fed basher" and "neopopulist" as if Dodd was either of those things -- despite his political interests, he's not -- and as if the history of the Fed's influence on the financial industry began sometime during the summer of 2008, and not before, when the Fed's regulatory supervision of both consumer lending and major financial institutions was an abysmal failure. A reformed Fed ought to have a role in financial regulation, and Bernanke's actions during the crisis do deserve praise, but trying to paint the Fed's role in the financial sector over the last decade as positive is ridiculous.

Our noble columnist isn't even familiar with the broader outlines of the ongoing regulatory reform project, because he seems to think that the Fed is going to be solely responsible for being the lender of last resort in the future. In fact, both the House and the Senate are seating those powers in a systemic risk council or consolidated regulator. The Fed will play a role in either the council or need a good relationship with the super-regulator, but whatever the final reform structure is deals with his objections already. Ignatius seems to think that we should enshrine the same system we had during the financial crisis last year, when bailouts were basically the only option besides economic disaster. It's a good thing that the Fed bailed out the banks in that particular case, but it's not a normatively good idea -- why not improve the system so that regulators don't have to make choices between two bad options in the future?

-- Tim Fernholz