In a recent podcast, David Beckworth asked Bill Nelson about the difficulties involved in shrinking the Fed’s balance sheet. In recent years, bank examiners have begun pressuring banks to hold high levels of reserves. Nelson suggested that the Fed needs to educate bank examiners on the fact that bloated reserves are not necessary in order to insure adequate liquidity:
Beckworth: Maybe just off the bat, how are examiners getting in the way of monetary policy?
Nelson: Even before doing that, I do want to make it clear that everyone here is operating with good intent. I don’t want to cast bank examiners as somehow, deliberately, as obstructionist. It’s just a matter of entrenched practices and experience that ends up having that effect. . . .
Nelson: I think there’s a few things that need to be done that could really help a lot. One is just public communication by the leadership of the Federal Reserve that borrowing is normal. Borrowing is a business decision on the part of banks. That’s especially true for the standing repo facility that they’ve just created, that they intend to look differently than the discount window and be perceived as a normal business decision. Leadership of the Fed needs to explain that to the public and they need to explain it to Congress, and they need to explain it to their supervisors.
This problem has been going on for years. So why hasn’t the Fed already told bank supervisors to clean up their act? There is no good reason to require banks to hold large quantities of reserves—they serve no useful purpose and make monetary policy more difficult.
It seems to me that this is just one example of a much broader problem, one part of a bureaucracy sabotaging another. For instance, in China the government just announced an initiative to encourage more births. At the same time, the Chinese bureaucracy does not allow Chinese couples to have more than three children. One part of the Chinese bureaucracy is sabotaging another.
In New York City, the government banned the construction of new single room occupancy apartment buildings, even as their housing bureaucracy desperately tried to create housing for the homeless.
Bureaucrats at the EPA try to encourage the switch to cleaner forms of energy, even as the requirement for environmental impact statements makes it difficult to build new clean energy infrastructure. Indeed the regulations on drilling for clean energy such as geothermal are actually stricter than for dirtier types of energy such as petroleum.
Progressives often focus on what the government should be doing to advance their goals. They focus far too little on what government is already doing to stymie their objectives.
