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Political independence of FED - Essay Example

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It is apparent that financial sector plays a critical role in regulating financial matters in a country, particularly the Central Bank. However, political interference has been blamed for continued interference with how the financial regulators operate. …
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Political independence of FED
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Political independence of FED

Download file to see previous pages... This has been contributed by the fact that politicians like manipulating and controlling these institutions for their own gains. In his lectures, Bernanke (2012) argued that central bank should be allowed to make independent decisions without political interference in order to have sound decisions. Studies have documented that political interference in the financial sector not only hinder how these institutions operate, but also interfere with how regulators enforce regulations. Financial regulators are, therefore, unable to take actions on banks that do not follow the laid down rules and regulations. When political interference is evident in the financial regulatory bodies, recognition of severity of crisis is delayed, intervention needed is also slowed and consequently raise the cost of the crisis to tax payers. Shielding financial sector from political interference helps to improve the quality of regulation and supervision. This helps in preventing financial crisis. Financial regulators have two main purposes. First, they are mandated to protect the consumer. Second, they are also mandated to maintaining financial stability of financial institutions. When political interferences come in, these two roles of the regulator are abandoned. For instance, in 1997, political interference in the regulatory bodies of East Asia led to postponement of recognition of severity of crisis, which led to increased crisis. ...Download file to see next pagesRead More
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