Financial Regulatory Reform Initiative: A Flexible Federal Reserve Is the Best Way Forward

Martin Neil Baily and Phillip L. Swagel, co-chairs of the Financial Regulatory Reform Initiative have made a statement detailing how they foresee a potential catastrophe should there be another financial crisis.

The Federal Reserve needs more flexibility to act in cases of emergency, according to the co-chairs, and they cite a September 2014 report by the Bipartisan Policy Center (BPC).

The BPC’s Systemic Risk Task Force made recommendations to Congress, requesting that the Federal Reserve be given the ability to disburse emergency loans to individual non-depository institutions.

This would help broaden the access to the Federal Reserve’s emergency lending facilities. Currently, these funds have been used for backdoor bailouts, particularly for firms that were deemed too big to fail.

They reason that the central bank is not able to authoritatively make quick decisions that can protect the financial system from collapse. The Task Force argued that without adequate power, the lives of ordinary tax paying Americans would be negatively affected.

With private investors taking inappropriate risks knowing that they will be bailed out, there is mounting evidence that supports the need for the Fed’s flexibility to act. The co-chairs argue that the Fed should not act only as a ‘lender of last resort.’ Having restrictions placed upon it to lend more fairly to a broad range of firms, instead of the ability to lend on punitive terms to troubled firms Bailey and Swagel say, “gets the logic of moral hazard backward.”