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Sheldon Richman is the editor of The Freeman and "In brief." He is a contributor to The Concise Encyclopedia of Economics ("Fascism").
If you’re not careful when throwing a boomerang, it could come around and hit you in the back of the neck. Politicians and bureaucrats should learn the same lesson when touting their supposedly indispensable role in safeguarding the country’s economic security. If you look closely, you find that they are the biggest source of the very dangers they presume to protect us from.
Last month the Treasury announced a “Framework For Regulatory Reform,” which “focuses first on containing systemic risk.” The release said: “While we strengthen prudential oversight for all firms, we must also create higher standards for all systemically important financial firms … to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy.”
The Treasury is not alone in talking about this. Rep. Barney Frank, among others, wants Congress to create a “systemic-risk regulator,” perhaps within the Federal Reserve. Fed chairman Ben Bernanke also sees the need for the government to regulate systemic risk. In a speech to the Council on Foreign Relations in March titled “Financial Reform to Address Systemic Risk,” Bernanke said, “Any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management and financial condition, and be held to high capital and liquidity standards.”
There is something bizarre, indeed, about government assuming the role of protector against systemic risk. Knowledge problems aside, is there any entity in our society that presents a greater systemic risk than the U.S. government, including the Federal Reserve?
The Fed
The biggest single creator of systemic risk is the Federal Reserve. It manages the money supply, and money is part of virtually every transaction that occurs. Its monetary conduct also influences the most important set of prices: interest rates, key signals that coordinate the allocation of scarce resources over time. By tampering with those signals the Fed is in a position to make huge mistakes that can harm everyone–which is exactly what it has done throughout its history.
“Manages the money supply” doesn’t quite capture what the Fed really does. It creates money out of thin air to carry out macroeconomic objectives and, most recently, to bail out firms deemed too big to be permitted to fail.
What could be a bigger systemic risk than a legal counterfeiter whose handiwork is legal tender? Here is a true weapon of mass destruction.