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Home Publications Blogs Beat the Press The Washington Post Thinks That Bankers Act in the Best Interest of the Economy

The Washington Post Thinks That Bankers Act in the Best Interest of the Economy

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Wednesday, 22 February 2012 05:16

That is what readers of a piece on the Fed's recommendations for housing policy are likely to take away. At one point the article comments:

"More than perhaps any other federal agency, the Fed was established to operate independently of both the president and Congress so that it would be free of political pressures when judging what’s best for the economy."

What is most extraordinary about the Fed is the fact that it includes the industry it oversees, the banking industry, with the ability to appoint members of its governing buddy. While other regulatory bodies, like the Federal Trade Commission and the Federal Communications Commission, are subject to influence by industry lobbyists, the 12 heads of the Federal Reserve Board's district banks are essentially appointed by the banks.

These bank heads in turn play a direct role in setting monetary policy, with 5 of the 12 sitting as voting members of the Open Market Committee, the body that sets monetary policy. The other 7 also take part in meetings, but do not have a vote. The influence of the banking industry on the Fed's conduct does make it more independent of democratic control, but it does not follow that it leads it to do what is "best for the economy."

Also, those reading this article may conclude that the Post still has not heard about the housing bubble. At one point it told readers:

"These policies [the Fed's low interest rate policy, coupled with its quantitative easing] should be making it easier for people to buy homes, launching a virtuous cycle of rising housing prices and fewer foreclosures."

The housing bubble has been in a process of deflating for the last 5 and a half years. Nationwide, house prices are just now returning to their trend levels. No one has presented any research that suggests that house prices should return to their bubble-inflated levels as the Post's comments seem to imply. In reality, we should expect house prices to stabilize near their current level and then roughly rise in step with inflation, as they have done for more than 100 years.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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