Macro Control, Micro Problems

Deanna Miller

I found this article, Macro Control, Micro Problems, on the website for The Economist.  This article discusses the actions that the United States Federal Reserve can and will take to get our economy back on track.  In order to do so, the Federal Reserve Bank is “keeping interest rates at zero and buying bond; but in doing so, it worries, it is egging on dangerous risk-taking” (Macro Control, Micro Problems, 2013).  Keeping interest rates at zero is a very radical policy for the Federal Reserve to take.

In class, we discussed the different monetary policies that the Federal Reserve Bank could put in place.  To raise income the Federal Reserve Bank can use an expansionary policy by decreasing discount rates and the required rate of return, or buy bonds.  To decrease income, or enact a contractionary policy, the Federal Reserve Bank can increase discount rates and the required return rate, or sell bonds.

The article also mentions a macroprudential policy which, “in theory, central banks would use regulatory and supervisory authority to stamp out excesses in specific markets while leaving monetary policy to take care of inflation and employment” (Macro Control, Micro Problems, 2013).  So in addition to enacting a monetary policy explained above, the Federal Reserve Bank can set new regulations and create new authority in order to target specific markets.  This has been used in the past through credit controls and down-payment limits, however when these controls worked, “political pressure sometimes led to their repeal” (Macro Control, Micro Problems, 2013).

The article discusses the history behind macroprudential policy.  After the stock market crash, the Federal Reserve required banks to limit the loans they gave to stockbrokers, though this only meant a rise in loans through corporations.  In 1935, the Federal Reserve Bank gained the power to use reserve requirements, which, like we discussed in class, meant that banks had to keep a certain amount of their deposits on hand.  And while this somewhat reduced the growth of bank credit, there were non-banks that stepped into the market to give out loans (Macro Control, Micro Problems, 2013).  It seems that whenever the Federal Reserve Bank made a move to limit the banks, a market opened for whatever the service the Fed tried to limit (i.e. loans).  This takes away some of their authority; if the Federal Reserve Bank enacts a new regulation and the bank can find a way around it, then what is the point of having a Federal Reserve Bank?  The point that this article is trying to make is that history has a way of repeating itself, and these regulations that the Federal Reserve has put in place will help the economy only until commercial banks or non-banks find a way to get around them.

Works Cited

Macro Control, Micro Problems. (2013, June 1). Retrieved June 21, 2013, from The Economist: http://www.economist.com/news/finance-and-economics/21578654-history-shows-limits-macroprudential-policy-curbing-dangerous