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Winter 2015

ISSN 0890-913X

Volume 30, Number 4

The Federal Reserve System's Overreach into Credit Allocation

Lawrence H. White, George Mason University

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TheJournalofPrivateEnterprise30(4),2015,17–29TheFederalReserveSystem’sOverreachintoCreditAllocationLawrenceH.White*GeorgeMasonUniversity______________________________________________________AbstractTheFederalReserveSystem’sattemptstodirecttheallocationofcreditsince2007havebeenoverreaching,wasteful,morallyhazardous,andfraughtwithseriousgovernance(potentialcronyism)problems.Accordingly,theFedshouldremoveitself,orberemovedbyCongress,fromtheformulationandimplementationofcredit-allocationpolicies.______________________________________________________JELCodes:E42,G28,P16Keywords:FederalReserveSystem,preferentialcreditallocation,cronyism,moralhazard,quantitativeeasing,interestonreserves,BenBernankeI.IntroductionTheFederalReserveSystem’sattemptstodirecttheallocationofcreditsince2007,begunundertheleadershipofChairmanBenBernankeandNewYorkFederalReserveBankPresidentTimothyGeithner,havebeenoverreaching,wasteful,morallyhazardous,andfraughtwithseriousgovernanceproblems.1Before2007,theFederalReserveSystemhadfivemainroles:(1)clearingandsettlementofchecks,(2)issuingpapercurrency,(3)supervisingandregulatingcommercialbanks,(4)actingaslenderoflastresort,and(5)formulatingandimplementingmonetarypolicy.Since2007,ofitsowninitiative,theFedhasexpandeditsactivitiesbyundertakingunprecedentedcreditallocationpoliciesthatdonotfitintoanyofthesetraditionalcategories(theFed’sownclaimstothecontrarynotwithstanding).Acentralbankalreadychargedwithfive*AnearlierversionofthispaperwaspresentedinMarch2014astestimonybeforetheSubcommitteeonMonetaryPolicyandTradeoftheCommitteeonFinancialServices,USHouseofRepresentatives.Ithanktworefereesforhelpfulcomments.1JeffreyRogersHummel(2011)makesasetofargumentsthatoverlapswithmineagainsttheFed’sexpandedrole,whileMarvinGoodfriend(1994,2014;GoodfriendandKing1990)hasfortwodecadesrepeatedlycalledforremovingtheFedfromcreditallocation.SeealsoThornton(2009)andMcCulloch(2014).17

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Metadata [hide]

Title	The Federal Reserve System's Overreach into Credit Allocation
Authors/Creators:	Lawrence H. White, George Mason University
Year:	2015
Volume:	30
Number:	4
Pages:	17 - 29
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Federal Reserve System, preferential credit allocation, cronyism, moral hazard, easing on reserves, Ben Bernanke

Citation:
White, Lawrence H. / 2015. "The Federal Reserve System's Overreach into Credit Allocation." The Journal of Private Enterprise, 30(4): 17-29.