Sen. Chris Dodd’s reform bill would jeopardize the Fed’s ability to safeguard the U.S. economy, Frederic Mishkin, former Federal Reserve Board governor and a Columbia University economics professor, told CNBC on Thursday.
“You don’t want to put the central bank in a situation where it can’t do its job,” he said. “If the central bank in a country is in fact too tied into the political process, what we find is, they’re more likely to print money, monetize the debt. And guess what you get out of that? A lot of inflation.”
Sen Dodd (D-Cn.) and Rep. Ron Paul (R-Tx.) have both proposed bills to reform the Fed.
While the central bank should be held accountable, said Mishkin, Dodd’s bill would undermine its ability to inject liquidity if necessary again. In particular, Dodd’s plan would put restrictions on the Fed’s ability to make loans, he said.
(See the accompanying video for the complete interview.)
“The danger here is the Federal Reserve will not be able to do its job properly,” he said. “If the Federal Reserve had not been able to do what it did during this episode, we could have had a Depression.”
In an interview with CNBC's Maria Bartiromo on Wednesday, Dodd defended his plan: “We need more eyes with a diverse look watching for systemic risk," he said. "This crisis is so large that we need to take advantage of this moment and not act timidly.”
While Mishkin said the the Fed should be held accountable, it’s imperative that it be done in the right way. The Paul bill, which Mishkin has endorsed, would subject the Fed to auditing by the Government Accountability Office [GAO].
“Under these new lending programs, the Fed does need to be more accountable,” he said. “But, you’ve got to do it in a way that it doesn’t hinder the ability of the central bank to provide liquidity very quickly when it’s needed.”
Meanwhile, one hidden benefit of the current Federal Reserve System, said Mishkin, is that its power is dispersed across twelve regional banks. And local businesses also play a role in its management, he said.
“That keeps the Federal Reserve System more real,” he said.