It's About Time We Politicized the Fed

Monetary policy deserves public scrutiny.

(Page 2 of 2)

Politics—however ugly and despicable it gets—is the best way for us to sift through these concerns. If politics is good enough to decide war, health care and education policy, it's good enough for the Fed.

David Harsanyi is a columnist at The Denver Post and the author of Nanny State. Visit his website at www.DavidHarsanyi.com.

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  • Max||

    Why the fuck would anyone care what Harsanyi thinks about anything?

  • xaM||

    * slow clap *

  • ||

    Max, what an insightful, thought provoking comment! You must have put seconds of thought into it.

  • Douglas Fletcher||

    You're giving him too much credit.

  • shrike||

    we should listen to Obama.

    no, scratch that, we need to just shut the fuck up and let Obama do whatever he wants.

  • Max||

    ARFARFARFARFARFARFARF!!!!!!!!!!!

  • Old Mexican||

    Re: Max,

    Max, H&R's pet yorkie.

    Here Max! Here, boy! Go fetch! That's a good boy! Yeah!

    No, no, no! Don't do your banalities on the carpet! Bad Max! Bad, bad Max!

  • MacGhil||

    Well, Max, you two do have one thing in common. He hates Ron Paul too.

  • whatever||

    I thought only kooks like Ron Paul talked about the Fed? Is reason.com a kook site now? Why would anyone question the wisdom of Helicopter Ben? This Harsyani is probably a racist.

  • ||

    Harsanyi's fine when he's not parroting rants about Obama. At least half his columns are all right. Some are disappointing, but I don't see the problem with this one. Maybe if your comment had more substance, we'd know.

  • Almanian||

    "it is very important to keep politics out of monetary policy"

    HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!!!!!

    Whew - man, that was a good one, Timmeh!

  • juris imprudent||

    Y'know, to an extent that is true. You would prefer to have Congress setting monetary policy like they do everything else? We'd end up with a currency looking up at the peso.

    Now, if you want to change the whole monetary system, that is another question - but turning control over to Congress doesn't make a hell of a lot of sense to me.

  • Almanian||

    Oh, I don't question that it's maybe not so good - it's the straight-faced implication that it's NOT politiciezed now that is hilARious!

    That Timmeh - what a card!

  • JoshINHB||

    You would prefer to have Congress setting monetary policy like they do everything else? We'd end up with a currency looking up at the peso.

    The monetary base will have quadrupled by the time QE2 is done so it's not like the Bernank isn't trying to make the dollar like the peso. He's just incompetent in executing - so far.

  • Draco||

    Wrong. There are no quantity effects to the QE2 move, only (hoped for) duration effects. In other words, it's an attempt to change the term structure of interest rates. And it's pretty weak tea - and is going to have nothing like the dire consequences that the Austrian libertarians and conservatives on this forum believe.

  • JoshINHB||

    You might want to let the Bernank know that since increasing inflation is stated reason for QE2.

  • Amakudari||

    Within limits. I'm pretty sure that if the CPI goes above the target 2% (or more realistically, 3%) p.a. -- even without job growth -- the Fed will say fuck it and start trying to rein in inflation.

    My criticism of them has entirely to do with all the programs they created during the crisis, ostensibly to ensure liquidity, that just wound up as subsidies to big banks. And then there's AIG.

  • JoshINHB||

    I share your criticism of subsidies to TBTF banks, but that is the primary purpose of all central banks.

    WRT inflation. There is now way that the fed will take anti inflationary measures unless the economy is much better than it currently is.

    US monetary policy has crashed through the guardrails and off the road. Momentum is carrying us forward through the air at this time, a crash is inevitable and there is nothing that the "elites" "driving" the car can do to avoid it.

  • ||

    So, your position is that QUANTITATIVE Easing has no QUANTITY effect on monetary valuation?

    Well, makes sense to me... I don't know what I'd do if geniuses like you weren't around to explain such complex things to me. Thanks!

  • Rrabbit||

    Current the Fed is a mix of political influence and influence by the big banks.

    Neither is good, both must go.

  • ||

    I think we should just consult the Magic 8-Ball. At least it would be less confusing.

  • ABC||

    ¨Monetary policy is a complex and mystical business—yet it was not, as far as I know, handed down from God to Moses to Alan Greenspan.¨

    ANTI-SEMITE!!!!

  • Old Mexican||

    Monetary policy is a complex and mystical business[...]

    Infused with crackpottery.

    Many economists argue that this kind of [monetary] policy has the potential to feed economic bubbles, distort trade, push nations to engage in competing devaluations, cause long-term inflation at home, and transform your dollar into something ... well, less.

    It wouldn't be the Austrian economists you're alluding, would you?

    Now, the argument for Fed autonomy is based on the importance of monetary stability.

    It's not really an argument, more like an excuse.

    But to the columnist, it seems that the Fed is causing more unease, unpredictability, and concern among investors and citizens than ever.

    Not only to you, David. The Fed was NEVER designed to provide stability, but to keep the fractional reserve Ponzi scheme alive.

    Once the Fed instigates volatility, doesn't the argument against political intervention dissipate?

    Dissipate for whom? Unfortunately, the belief in the Fed's importance is more mystical than rational.

  • Andy Jackson||

    What would I do?

  • Tom Jefferson||

    I would repeal their ass out of here.

  • Anonymous Coward||

    Challenge them to a duel and kill them?

  • ||

    This article has all the intellectual rigor of a 20-pound turkey cooked at 350F for, oh, half an hour. Reason, I expect much better than this hackery.

  • Old Mexican||

    Re: John Pirie,

    This article has all the intellectual rigor of a 20-pound turkey cooked at 350F for, oh, half an hour. Reason, I expect much better than this hackery.

    "And you won't get a reason from me as to why I think that! So there!"

  • ||

    What kind of a call to thought or action is "the Fed should be politicized"? How exactly? How is it not so now? What benefit accrues and exactly why? Where is the shred of indication the writer even knows the counterarguments and has considered them? Actual merits of any of those arguments aside, this article is a holiday-deadline piece of fluff.

  • Old Mexican||

    Re: John Pirie,

    What kind of a call to thought or action is "the Fed should be politicized"? How exactly?

    For starters, declaring it UNCONSTITUTIONAL . . . because it IS.

    What benefit accrues and exactly why?

    a) The government obeys the Constitution, for a change;
    b) People would be able to make binding contracts in whatever currency they wish, including gold and silver;
    c) No further manipulation of the money supply to fuel government expansion and largess.

    Where is the shred of indication the writer even knows the counterarguments and has considered them?

    Counterarguments to what? Politicizing the Fed? ALL of them can be encompassed with: Don't touch MY [Fed's] junk, bro!

  • ||

    OM, you seem to be talking about the Fed. I'm talking about the quality of the author's writing and his ability to put forth a sound, engaging, persuasive argument and call to action. Shall we keep posting right past each other?

  • Old Mexican||

    Re: John Pirie,

    Ok, you're right - the article itself is not very good. I'm just not that crazy about the Fed.

  • Mike M.||

    "U.S. leadership, once taken for granted, has all but vanished, and no one's in charge," wrote the editorial board of not the National Review, but the San Francisco Chronicle.

    Ha-haaaa! Those poor schmucks; most of them probably seriously believed all their own bullcrap they manufactued about Obama, too. Go to hell, S.F. Chronicle.

  • non||

    I can hardly wait until the Fed is run as well as the rest of the government.

  • Obama||

    Thanks!

  • Draco||

    Why are these kinds of far-reaching decisions regarding our economic future immune from political debate and legitimate public scrutiny?

    Based on what I've seen just on this forum - filled as it doubtless is with people of above average intelligence and education - keeping Joe Six-pack and his political representatives very, very far away from monetary policy is probably seen as a great idea - especially given the very real cost of making a major mistake. Few understand it, fewer still would be able to manage it if they did understand it.

  • robc||

    Even worse would be letting those who think they understand it anywhere near monetary policy.

  • robc||

    And by that, I specifically meant Draco.

  • ||

    Better stock-up what you can, while you still can...China & Russia just dropped the dollar
    http://www.chinadaily.com.cn/c.....599087.htm

  • JoshINHB||

    There dropping it for bilateral trade with each other. So it's really not that big a deal.

    But this is interesting

    The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

    Is this the start of a floating currency for China?

  • ||

    I see an arbitrage opportunity. With the RMB pegged to the dollar, but not the ruble, a three-way trade can reap the difference between the RMB's official value and its real value.

    -jcr

  • BakedPenguin||

    Ha! Finally, I'm ahead of someone with a post today.

  • Horny for the Fed||

    Mmmm... I like three-ways.

  • Amakudari||

    There are plenty of currencies pegged to the dollar. Heck, you only need to look a bit to China's southeast to find the Hong Kong dollar, which is pegged to the US dollar. I'd suspect arbitrage opportunities will be few and far between. If the ruble appreciates against the dollar, it should appreciate to (about) the same extent against the yuan.

    Also, just semantics, but the official value of the yuan is the real value. What's different is the value were the yuan floated, which is what Geithner's lip service about letting the yuan appreciate is about.

  • Pan||

    Start getting worried when China, Japan, the UK and OPEC countries get rid of their US treasury securities.

    China and Japan are over $800B a piece, UK at $450B, OPEC at $230B. There are no signs of any of the big holders reducing their shares because there are no safer alternatives at this time.

  • ||

    Larry King Interviews TSA officer that made young boy strip search

    http://youtu.be/gpE_nzSSmXQ

  • ||

    Larry King Interviews TSA officer that made young boy strip search
    http://youtu.be/gpE_nzSSmXQ

  • ||

    We were so close to an audit of the fed. So close...

  • JoshINHB||

    It will drop another $600 billion into the economy even though the first round of more than $1 trillion failed to do much of anything.

    A couple hundred billion in WS bonuses aint nothing.

  • Chuck Schick||

    I agree with most of the commentary that politicizing the Fed is a bad idea. Harsanyi himself hints at that with this bait:

    "If politics is good enough to decide war, health care and education policy, it's good enough for the Fed."

    A good first step for the Fed, and one which has previously been alluded to in these pages, would be to get rid of the employment clause that politicians have stuck it with, leaving it with a core function of providing price stability.

    And yeah, I know that the Bernank thinks that housing stock is the leading indicator of price stability, but what are you gonna do?

  • ||

    Actually, that first trillion did quite a lot, but none of it good. It postponed the necessary liquidation of many failed banks.

    -jcr

  • Ben Bernanke||

    Now, I'm in no position to offer any definitive statements on quantitative easing.

    Heh. Me, neither.

  • Mo||

    If Bernanke lost his marbles, the rest of the Federal Reserve Open Market Committee could overrule him. QE2 wasn't decided by fiat by Ben, it was a 10-1 vote by the FOMC. There are a variety of different voices in the Fed. The structure of the Fed is more akin to that of the SCOTUS than a cabinet level position. Like the SCOTUS, I think it's better to leave day to day politics out of their decisions.

  • bohica||

    Five-dollar foot-long!

  • Mike M.||

    By the way, Barbasol Ben and his Merry Fed Men have just passed the People's Republic of China and are now officially the largest holder of U.S. Treasury bonds.

  • JoshINHB||

    Thank god their doing that without monetizing the debt.

  • Obama||

    Pros for collapsing the US dollar: I can finally destroy the US economy.

    Cons for collapsing the US dollar: The rest of the world will be affected, which might affect my popularity overseas (which is all I cared about.)

    But wait, I can just say I inherited this situation, which is an air-tight excuse, and because people are stupid, they'll believe me.

    See you in hell, US dollar!

  • ||

    Ditch the Fed. The old song lyrics are appropriate: "Got along without ya before I met ya, gonna get along without ya now."

    It's just another way for the folks who use the government and political processes to line the pockets to do so. And, of course, to help out their friends and stab their enemies, only without being as obvious about it as the politicians when they pass a law they didn't read.

    Whatever they claim to be able to avoid or alleviate was never so harsh before the creation of the Fed as after its creation. Except, of course, for the idiot bankers and their arithmetically-challenged peers.

  • ||

    As much as I hate the fed, assuming we don't go back to the gold standard, the alternative is that the congress controls the money supply. Can any one say Zinbabwe?

    http://cgi.ebay.com/AUTHENTIC-.....5d2c2560d3

  • Mr. FIFY||

    $2.43 for a trillion Zimbababucks? Wow!

    I wonder if that dimwit goth chick down at the convenience store could tell it wasn't U.S. currency...

  • Amakudari||

    I tried to look for the actual exchange rate, but apparently the ZWD was discontinued in 2009, and Zimbabwe now uses foreign currencies like the dollar and the rand.

    That's what happens when inflation reaches 5,000,000,000% (literally).

    Also, Zimbabwe is a great example of a politicized central bank. This is not to say I support the Fed -- my monetary pet policy is the encouragement of competing currencies -- but politicization is far more inflationary than the status quo.

  • alan||

    The numero uno problem with reforming the Fed is the strong probability that the direction that reform takes will not be along sensible lines like that of competing currencies of bank note issuance whose value is determined by the market, but reform would likely be of a populist bent embracing Greenback hackery. For some reason, it has a following in the tea party in spite of its history of being entirely a destructive leftist movement. Modern Keynesians like to gloss over the debt JMK owed to the crank Major Douglas which he acknowledged in General Theory:

    Since the war there has been a spate of heretical theories of under-consumption, of which those of Major Douglas are the most famous. The strength of Major Douglas's advocacy has, of course, largely depended on orthodoxy having no valid reply to much of his destructive criticism. . . .

    On the other hand, the detail of his diagnosis, in particular the so-called A + B theorem, includes much mere mystification. If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption. Major Douglas is entitled to claim, as against some of his orthodox adversaries, that he at least has not been wholly oblivious of the outstanding problem of our economic system. (General Theory, pp. 370—71)

    This is nuts, of course. Money doesn't just die once capital is paid back creating a situation where fiat currency needs to be injected in to replace the 'spent' money. Keynes' followers would like you to not be aware their God took that shit seriously, but he did.

    The chances of replacing one set of cracked pottery with another that is only superficially different in theory but lacks the checks built into the current system if monetary policy were to be turned over to the legislature would be pretty strong if the momentum for change ever got rolling.

    Not saying reform shouldn't be done because there is much that is destructive about the current system. You can't always count on having a Volker in place at the right time when dealing with a top down system that attempts to replicate a multiplex market of moment to moment decisions with best guesses, produced from stats, that are then voted on at board meetings. Seems kind of crazy that those who should know better, Monetarist, would find that acceptable, but there you go. Crazy.

    All you can really do is advocate for your position, and I'm on the same page with you, but at the same time, you have to be on your guard that advancing your position doesn't give a footing for some loon working on Dennis Kucinich's staff.

  • JoshINHB||

    This is nuts, of course. Money doesn't just die once capital is paid back...

    If the money is created through debt then it most certainly does die when the debt is paid.

    The chances of replacing one set of cracked pottery with another that is only superficially different in theory but lacks the checks built into the current system

    Any system of fiat currency must have checks built in to prevent run away inflation. The checks in the current system are breaking down.

  • alan||

    Well, I'm glad you cleared that up. When a business pays off the debt on their capital goods, and the bank accepts the payment then the value of the capital goods and the balance sheet of the bank then solves for zero with the value of both then being wiped out? How otherwise could it be? The money as represented in the value of that trade is now dead?

    No, the money is then relent as that is what banks do unless they have outside incentives to not behave in a rational manner*, or when a depositor cashes out but does not exchange the 'spent' money for goods and services but puts it under the mattress instead. Those are the only exceptions where underconsumption theory even applies.

    As long as other goods and services retain value the commodity of money still retains value in relation to those goods, services and debt issuance. It does not matter if the person uses that money to pay off a debt where the bank turns around and lends it out again or the person buys from a seller who deposits the money that is then lent out again, the conceptual difference here make all the difference in the world in overconsumption theories, like social credit, but is mute in reality, the money does not die in either case. It is still in circulation, and certainly does not need to be replaced with an equal amount of fiat currency to replace it, since it is still circulating (that is the crackpot nature of Social credit, and most underconsumption theories that refuse to limit it to actual physical money that falls out of circulation).

    Unless, you accept the premise behind Major's Social Credit, that money is not a result of exchange but is a product of governing edict where exchange is a secondary consideration and the existence of the monies is a more primary one (who came first the government or the governed?), I don't see how you accept this expanded definition of underconsumption. Even so, you have the problem of what actually occurs with money in the market to puzzle out if you don't accept the premise that it is the most liquid commodity in a market. Commodities don't die, they circulate.

    *behaving like a bank and not like a mere store house for T-notes, or being the early benefactors of a little quantitative easing.

  • alan||

    apologies for the lose editing. Some points may have been obscured as a result. In my defense, the smell of Coq au vin (everyone in my family hates turkey) was in the air, and I was growing impatient with dinner. I'm fattened. and ready for a nap now. Enjoy your Thanksgiving, Josh and everyone else. Yay, Pats!

  • JoshINHB||

    When a business pays off the debt on their capital goods, and the bank accepts the payment then the value of the capital goods and the balance sheet of the bank then solves for zero with the value of both then being wiped out? How otherwise could it be?

    You mis understand our financial and monetary system on a fundamental level.

    If you borrow money from me and then repay then in both transactions money has simply changed hands.

    However if yo borrow money from a bank, the bank creates money as part of the loan process, which is to say that they are loaning you money that otherwise does not exist, which is to say that they are creating money with the loan. The other side of that transaction is that the money created by that loan is eliminated (retired, destroyed, whatever) as the loan is repaid.

    Here is a simplified description of that process.
    http://en.wikipedia.org/wiki/F.....ve_banking

    Here are more in depth expanations
    http://mises.org/books/tmc.pdf

    http://mises.org/books/whathasgovernmentdone.pdf

    Unless, you accept the premise behind Major's Social Credit, that money is not a result of exchange but is a product of governing edict where exchange is a secondary consideration and the existence of the monies is a more primary one (who came first the government or the governed?)

    Of course money is a creation of government in our economy. Doubt that? Then take a silver dime to any retail outlet and try to get them to accept it for $2.40 of product, which is the nominal metal value today. That no clerk will do this proves that silver coins are not money today, they are an asset which can be exchanged for money.

    Conversely a slip of paper printed by an agent of the government, which has absolutely no objective value as an asset will be accepted for payment of goods and or services up to the arbitrary number that is printed on that slip of paper.

    Money is a medium of exchange, not more nor less, and in our society government can and has decreed that federal reserve notes, US minted coins and financial equivalents are the only legally enforceable medium.

  • theunknown||

    Whenever someone says we need to get the politics out of government decision making they are really saying that we must get rid of the people's democratic decision making power over how the government run.

  • ||

    This article is pretty wrong. The Fed has already become politicized, and that is the root of these problems. Let's assume for a moment that the columnist is right, and the Fed is still an apolitical body. Does that mean that because in this circumstance the Fed is causing some disorder, that next time it will? Politicization is not wise. If it becomes politicized, than the Fed will become even more discredited than it will now and will effectively cease to function. This argument is not very well thought out.

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  • Ekim||

    Alternatively, the bank could just be run by computer like Milton Friedman advised. That way, the nation could not be harmed by chairmen who lost their marbles.

    The only thing the current system has produced is serial bubbles, constant inflation (aka ripping off consumers), and credit crises (bank bailouts).

    The nation does not need inflation ripping off consumers, and distorting capital allocation. Our nation got along just fine for the first century without inflation, and became the world's super power economy to boot.

  • CE||

    More evidence that Ron Paul is slowly winning in the court of public opinion. Four years ago, even the libertarian-leaning Reason magazine considered him kooky for ranting on and on about monetary policy.

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