Question:

Should we be cautious of Obama's support to give the Federal Reserve more oversight power?

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My current thoughts on Obama are that he is overall a good guy and that he wants to help out the average American; however I ponder this: why would Obama want to allow the Federal Reserve, which is ran by privately owned banks, MORE power to control our country's banking/lending practices? In my opinion the main reason we are in such a mess economically is because the Federal Reserve and affiliated banks/lenders acts on their own personal interests above the American people's; and this is not because they are terrible people, but because they have no legal accountability to do so! Ever since they caused the initial Depression and gained control over all of the thriving non-affiliated banks, we have lost any sort of "free" market within our country when it comes to banking/lending. Now Obama wants to give them even more power? Am I the only person who has a problem with Obama's plan to give the Fed more oversight power to protect THEIR OWN interests?

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  1. do you really think obama is good? i think he sucks and hope mccain beats him!! if you disagree you should go vote for obama on this site..


  2. People who think this way don't understand why the Federal Reserve is independent. If the banks were publicly controlled, we would expect to see politicians using them for political gains. For example, for decades in Mexico, PRI politicians would have the central bank allow the currency to appreciate because currency appreciation (increase in value) is very popular for pretty much everyone. Unfortunately, you can't sustain it for very long because eventually your currency becomes too expensive, and thus no one wants to buy your goods while your people import over-cheap foreign goods (trade deficit). Thus, every six years, after the election of the next PRI president, the Mexican economy would take a hard hit as the currency suddenly devalued. The lesson? A central bank needs to be politically independent so it can make unpopular but necessary moves to keep credit and the value of money under control.

    Edit:

    I believe that the Fed is constitutionally sound because its mandate to print money is granted by Congress and can be revoked by Congress.

    To my knowledge, the Fed and its European counterpart, the ECB are not particularly interested in the successes of affiliated banks. What they are interested in is maintaining the reliability of the banking system as a whole. Hence, the Fed has to guarantee bailouts to any failing bank, so that people feel that their money is safe in the event of bank mismanagement.

    The alternative to having any central bank is to allow private institutions to fail without a safety net. They will tend to behave less riskily, but in the event of a failure there will be no safety net. The failure of a single bank can lead to a run on all banks as confidence in the banking system declines. This leads to further bank failures, since banks rarely keep assets on hand equal to the assets they hold on paper.

    Again, putting a central bank into a position of political accountability raises the likelihood that it will be used for political gain, and political and economic gains rarely coincide. By being politically independent, the Fed carries out its mandate concerned only with economic stability, rather than political fortunes.

    EDIT2: Another thing I forgot to mention earlier - the Fed maintains a lot of its assets in US treasury bonds, and the rest in dollars. Thus, it has a strong interest in maintaining the stability of the US government and banking system, because it is the faith in those institutions which backs the value of its assets. If the Fed permits faith in those to be shaken, its underlying assets - necessarily denominated in dollars and bonds - will be shaken as well. That is why the Fed can be trusted.

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