Today Secretary Paulson announced a new plan for the Fed to take more responsibility for regulating investment banks as well as some aspects of various exchanges. I haven't read the whole plan yet but it seems interesting. At the risk of agreeing with Obama who said (according to the WSJ) that the plan was inadequate and that he hadn't read it yet, my early take is that something doesn't sound right.
Leaving a true analysis of the pros and cons of Fed regulation to the professionals, here are some interesting points to think about.
First, currently the FED is assigned with two tasks: Full Employment and Controlled Inflation. One should note that other Central Banks are may be concerned with just one of these policies; The ECB primary goal is inflation control. One might ask if the Fed is doing a good job with one of these tasks (inflation) at the current time in their effort to stem job losses and boost inflation. How will the FED manage when they also are responsible for maintaining exchange stability or investment bank stability?
Second, the FED is not a branch of the government. It is somewhat independent and does not report directly to the executive branch. Various regulating agencies which Secretary Paulson recommends consolidating under the FED do. It appears that this may be a nice way of removing responsibility for banking industry regulation from the purview of the Executive Branch to a quasi-private organization. Do we really want that?