Bureaucrats Hampered by Bureaucracy – EconLib

A Recent podcasts, 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 maintain higher levels of reserves Nelson suggested that the Fed should educate bank examiners that inflated reserves are not necessary to ensure adequate liquidity:

Beckworth: Maybe right off the bat, how are testers getting in the way of monetary policy?

Nelson: Before doing so, I want to make it clear that everyone here is working with good intentions. I don’t want to cast bank examiners as somehow, willfully, obstructionist. It is only a matter of entrenched habit and experience that ends up having that effect. . . .

Nelson: I think there are some things that need to be done that can really help a lot. One is the public communication by the leadership of the Federal Reserve that borrowing is normal. Borrowing is a business decision on the part of the bank. This is especially true for the standing repo facility they just created, which they want to look at differently than the discount window and is considered a normal business decision. Fed leadership has to explain it to the public and they have to explain it to Congress and they have 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 amounts 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 wider problem, one part of a bureaucracy sabotaging another. For example, in China, the government announced an initiative Encourage more births. At the same time, Chinese bureaucracy does not allow Chinese couples to have more than three children. One part of the Chinese bureaucracy is sabotaging the other.

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 environmental impact statement requirements make it difficult to build new clean energy infrastructure. In fact, regulations regarding drilling for clean energy like geothermal are actually stricter than for dirty types of energy like petroleum.

Progressives often focus on what government should do to advance their goals. They focus too little on what the government is already doing to thwart their objectives.

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