I wish I could give a short and tidy answer to your question.

Remember, the Fed has two sets of responsibilities. The first is its regulatory function, to assure the safety and soundness of the banking system. The second is its monetary role which (I’m not looking at the statute. so this is my rough recollection) calls for the Fed to promote stable prices and employment.

The complicating factor is that the Fed (according to Willem Buiter) is the second least independent central bank in the world (only the Bank of Japan is more hamstrung).

However, I think most of the failings of the Fed are due to Greenspan, but even a more aggressive chairman might have had a hard time taking a tougher line (Theodore Levitt, SEC Chairman during the Clinton Administration, tried taking a more pro-consumer stand and was frequently opposed by Congress, which could cut his budget if he crossed them. Joe Lieberman was his fiercest opponent).

The problems with the current Fed are that it has dropped the ball on oversight. It has taken the “let a thousand flowers bloom” approach to risk management. The only methodology its examiners understand is value at risk, and that has plenty of flaws. So they can engage in only a very limited way with the big institutions on what they are up to.

This fit the ideology of the times, and also fit Greenspan’s personal views.

Note that the Fed’s mandate does not cover consumer protection. However, it can be faulted (in my view) for blocking state efforts in that area.

On the monetary front, the Fed has completely abandoned the idea of managing money supply in the Friedmanesque sense (setting monetary targets) and instead use inflation targets (not formally stated, as the EU has done). There are arguments against the use of money supply, the biggie being that with the proliferation of all the forms of near money and changes in the velocity of money, money supply isn’t terribly meaningful.

To me, that’s the wrong way to formulate the problem. That says to me the Fed should have been trying hard to understand what all these new forms of near money (what now is part of the so-called shadow banking system) implied for monetary policy. But all central bankers and academics have dropped the ball on this one.

Instead, Greenspan took interest in the stock market, and seemed to regard rising stock prices as a validation of his policies. That is horrible. The stock market is not the Fed’s job.

Bernanke inherited a mess. Not only had Greenspan created serial asset bubbles (which central bankers don’t have a mandate to deflate) but our lack of savings has led to big current account deficits, which puts pressure on the dollar. The Fed has no good options at this point, policy-wise. It can cut rates to salvage the financial system (which has the effect of rewarding behavior that ranged from incompetent to venal), tank the dollar, and leave the US with big-time inflation (which will erode the value of the debt overhang) or try to hold the line on rates, which will lead to a nasty, unpopular recession but will leave the dollar somewhat intact . If you subscribe to Schumpeter, recessions are necessary to clear out excesses.

The latter is the better course of action, in terms of the long-term health of the economy, but I doubt Bernanke has the nerve to implement it. Academic economists are easily bullied by market professionals.

As to your bigger point, I don’t see how we can do without a Fed or equivalent. The fact is that we do have institutions who are too big to fail. When they screw up in a major way, the losses are socialized. That in turn means they need to be regulated to reduce the likelihood they get themselves in deep shit. This is a basic conundrum of modern finance and there is no simple way around it.

That will happen a lot next year IMHO, but, its better to be counted in terms of the super majority, so its really not a wasted vote! Its a great vote!

“Democrats seem to be determined to make matters worse,’’ said House Minority Leader John A. Boehner , R-Ohio. “This job-killing agenda is the worst possible news at the worst possible time for American families and small businesses.’’

The Republican critique was met with incredulity from House Financial Services Chairman Barney Frank , D-Mass., who has brought forward several bills (HR 3915, HR 1852 and HR 1427) to try to ease the pain of the subprime mortgage crisis. The mortgage losses, and the resulting tightening of lending standards and multibillion-dollar write-offs by major banks in several countries, are a major reason for heightened economic fears.

“Even by the Republican standards, that is extraordinarily stupid,’’ Frank said. “No one believes that Democrats are responsible’’ for the economy, he said. “No one in the business community believes that.’’

Frank added that “Republicans are desperate to escape the blame.’’

yves, you linked to the story about kaufman.. from another part of that article, do you have any update on your position re the Fed’s competence? Given their shockingly massive under-estimation of losses from this credit implosion, I’m probably going to “throw my vote away” by picking Ron Paul to see if we as a nation can be freed of the uselessness called the Fed.

1) Government was the problem and,

2) Deficits don’t matter.

Rather than religious (little r) truths these statements were ,in fact, class warfare stratagems which were successfully executed leading to:

1) Corruption and the enrichment of the few.

2) Socialization of corporate costs (ex. The occupation of Iraq includes the cost of procuring oil reserves).

The past cannot be undone however the first step to repairing the damage is to recognize and crush the false economic “truths” embedded in the “Reagan revolution” which was nothing but centuries old class warfare with ruddy cheeks.

Jim