goals of the Employment Act have become a secondary priority. Goals of financial regulation had superseded goals of macroeconomic performance. The financial press has provided evidence for this view of speculation out of control: the Fed's hikes in the federal funds rate in seven steps during 1994-95 triggered an abrupt unwinding of speculative positions of banks, brokerage houses, mutual funds, hedge funds, and other financial institutions. Individual speculators managing multibillion dollar portfolios like George Soros have played a pivotal role. Even major industrial corporations and state and local governments - Procter and Gamble or Orange County, California, are examples - have, perhaps unwittingly, participated by handing over their excess cash for interest-earning instruments that promised very high returns at low, "hedged" risks. Many such institutions have incurred huge losses; Orange County has gone bankrupt. These events show clearly how the historic transformation of the U.S. financial system is undermining the Fed's effectiveness to carry out both monetary policy and financial regulation. The Fed's fulcrum for policy - the commercial banking system - is shrinking relative to the mushrooming growth of financial institutions outside the banking system, and beyond the direct policy reach of the Federal Reserve. The Fed is properly worried about speculation. Especially so since the burgeoning financial economy now dwarfs the real economy. Financial market gyrations affect the life savings, jobs, and incomes of millions of American families, not just the fortunes of the superrich. The opportunities and risks are not restrained by national borders, but are global in scope. For example, the foreign-exchange markets operate around the clock with trading in foreign exchange that adds up to roughly a trillion dollars a day. By comparison, U.S. exports and imports add up to just over a trillion dollars in a year - 1993 - when the t...
