FOREX TRADING

On that point was never much question about the fundamental causes of the credit crisis. In essence, combination of low interest rates and lax regulation fueled a leveraged credit expansion, which exploded spectacularly last fall. The primary issue has always been how to ensure such a crisis does not ever happen over again- at least not on the same scale. Towards that end, policymakers around the world have been busy over the last few months conducting hearings and soliciting expert testimony, and are now about passing sweeping inspection and repair of their countries’ respective financial systems.

Well, perhaps sweeping is too strong of a characterization. Anyhow, big changes are underway. The US government is leading the way, in attempting to strip the Federal Reserve Bank of its power to regulate consumer finance, but is compensating the Fed by handing it the authority to “oversee large financial institutions…The inspection and repair would also give the Fed a seat on a new council charged with guarding against financial-market meltdowns like the one that hit the banking system last year.”

Some other bill that’s presently working its way through Congress would enable the “Government Accountability Office to ‘audit’ the Fed’s decisions on monetary policy.” It’s unclear what precisely that would entail, but at the very least, it would remove some of the Fed’s independence. Already, the Fed is making an effort to increase its transparency, by expanding its interactions with the public beyond the “brief, cryptic statements that analysts busily decode in the days that follow” monetary policy decisions.

The most substantial change, particularly as far as currency traders and interest rate watchers are concerned, is the potential expansion of the Fed’s mandate, which is presently to “promote ‘full’ employment…while maintaining ‘reasonable’ price stability.” Future monetary policy, however, could be conducted with broader aims: “The Federal Reserve looks to be volunteering to be top bubble burster. In a recent speech, Bill Dudley, the president of the Federal Reserve Bank of New York, overturned more than a decade of Fed orthodoxy by claiming it was the central bank’s responsibility to defuse asset price bombs before they detonate.” While this declaration has earned plaudits from some economists, it comes with the caveat that asset bubbles could be difficult to identify and even more difficult to defuse. One has proposed that “Regulators develop a small set of measures of irrationality that can be calculated and published at least monthly,” but it looks unlikely that this will be implemented anytime soon.

Changes are also expected across the Atlantic: “Britain’s Conservative Party, likely to form the next government, wants the Bank of England to be in charge not just of interest rates, but also the two big tasks of regulation: guarding the overall system’s stability (’macro-prudential regulation’, as it is known) and the ‘micro’ supervision of individual firms.” As part of their proposal, the much-maligned Financial Services Authority, would be eliminated.
Naturally, no one knows for certain the extent to which the system will reformed, nor whether it will be successful. Conceivably, tighter regulation could be accompanied by equally tight monetary policy. Already, the hawks have begun to grouse “that the Fed might need to raise interest rates in the ‘not-too-distant future’ to fight inflation.” Not-too-distant indeed if the Fed also needs to keep a lid on asset bubbles.