Congress

No More Light On the Fed! or, Never Trust Anybody Who Says "Amidst"

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How many economists does it take to write a letter? More than 175, if the signatures on this Open Letter to Congress and the Executive Branch, defending the independence of the Federal Reserve Bank, are any indication. The economists write:

Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.

It's not clear what kind of interference, beyond extra-constitutional expressions of exasperation, the Fed needs to be protected from. Praising the central bank's role in "controlling inflation" is like pointing out that an arsonist also works for the fire department. Given how unpopular the economic interventionism of the last two years has turned out to be, it is also not clear that better oversight would stop the Fed from scaling back its "current unprecedented monetary accommodation," should the Fed ever choose to do so.

The line about politicizing lender of last resort decisions would be a winner, if there were such a thing as a central bank that is not already politicized in all its decisions. The last time the Fed actually did the right thing (by whipping inflation in the early 1980s) it was only possible because of coordination between Fed chairman Paul Volcker and President Ronald Reagan. (Read about it.)

As for altering the structure or personnel selection of the Federal Reserve System, I'd say it would be better for the Fed to be run by people randomly selected from the Paducah, Kentucky phone book. But why bother? The argument in the open letter amounts to: The college of cardinals is exactly as God made it.

Of course, every independent entity (like, say, Hollywood screenwriters and professional baseball players) should be protected from congressional interference. The Fed is not an independent entity. Its business is the long-term devaluation of the currency we are all compelled by law to use. Does this mean oversight by 435 despots will help? Probably not. But it's absurd to say that, because it publishes meeting minutes and comic books, the Fed need not be held to the standards of public disclosure and accountability citizens of a republic should expect from a central bank.

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  1. Why Paducah? Say, Reason isn’t shilling for Big SugarFree again, is it?

  2. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.

    You’ve been had. This must be an Onion article.

  3. They already lost the argument by the way they approached it.

    They’re proposing that the Fed’s performance justifies the degree of political freedom it enjoys. This logic leads to the conclusion that economic sabotage justifies greater control over the institution.

    Are they really so stupid as to ignore this rhetorical undercurrent, or are they willfully courting government intervention?

  4. Damn. HR1207 must have some people pretty worried.

  5. “You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out… If people only understood the rank injustice of the money and banking system, there would be a revolution by morning.” – Andrew Jackson

  6. “A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army… We must not let our rulers load us with perpetual debt.” – Thomas Jefferson

  7. “Independence of the federal reserve”, my ass. The Fed is not, and has never been independent. It is OWNED by a bunch of banks. If it were truly independent, it would have no incentive to inflate the money for the benefit of lenders.

    -jcr

  8. The Fed is not, and has never been independent. It is OWNED by a bunch of banks.

    Independent of government.

    Now, if it were completely independent, and not a legal monopoly, then who owned it would be of no consequence. The only consideration would be its performance and that of its competitors.

  9. Andrew Jackson is problematic in a lot of ways though.

  10. JCR – perhaps, since you whiffed on the first part of your past, you can inform us all how it is that inflation somehow “benefits” lenders? Spell it out for me, please, cuz I R dum.

  11. Greater transparency in anything is rarely a bad thing.

  12. The Angry Optimist:

    JCR must have meant debtors, not creditors (lenders). Inflation benefits debtors at the expense of creditors, and deflation benefits creditors and the expense of debtors.

  13. Devin – I realize what he should have said to make the idea correct, but it sort of undermines his point that the Fed inflates currency because its Master Banks tell it to for “evil profitssss”, doesn’t it?

  14. Inflation benefits the first guys who get their hands on the newly printed money for more than it benefits debtors.

  15. what is with this terminology of “newly printed money”? There isn’t any printing of anything, first of all. Second of all, tarran, how so? In what do those institutions benefit from inflation?

  16. isn’t it extraordinary how regulation is solely unnecessary only when it pertains to transparency?

    thank deity they protect us from everything else…

  17. Inflation benefits debtors at the expense of creditors, and deflation benefits creditors and the expense of debtors.

    Someone needs to look up the difference between nominal and real interest rates.

    Borrowers will not “benefit” (for stupidly myopic values of beneficial) simply from inflation. Instead you’d need ever increasing rates of inflation, and even then you’d need rates that increase faster than lenders have factored into the nominal interest on loans.

  18. You know, even amidst…

    ah..

    crap..

    I lose

    😉

  19. Borrowers will not “benefit” (for stupidly myopic values of beneficial) simply from inflation.

    Angry Econ Guy,

    No, tarran is right. The first guy who gets the new money is buying at the original prices. As the new money circulates through the economy, the prices of the things it is spent on go up. So the later you get the new money, the more price inflation you’re looking at to spend your new money. In this way, the people that get the money first are sucking their buying power out of the money of the people that get it later. This is a concept from Austrian Economics called “injection effects”.

  20. “Austrian Economics”

    Huh. I had no idea economics worked differently in Austria.

  21. Since the Fed’s inception in 1913 the dollar has lost 95% of its value.

    Imagine how much it would have lost if the Fed had not been “protecting” it!

    Thanks Fed!

  22. “Huh. I had no idea economics worked differently in Austria.”

    ask the Governator!

  23. All this because we want to know WTF the Fed is doing? Geez…just imagine what it would be like if we wanted to have the Fed actually answer for what they do, oh perish the though [roll eyes]

  24. The argument in the open letter amounts to: The college of cardinals is exactly as God made it.

    This “argument” is becoming ubiquitous, and it deeply distresses me. Bernanke (not to mention that guy who preceded him) is, by definition, the ideal man for the job, because he currently has the job.

    The Fed has always been subject to political pressure, but the current cast of characters seems intent on making the Fed a wholly owned subsidiary of the President’s economic team.

  25. The last time the Fed actually did the right thing (by whipping inflation in the early 1980s) it was only possible because of coordination between Fed chairman Paul Volcker and President Ronald Reagan.

    Saint Paul, appointed by… Jimmy Carter; which demonstrates, if nothing else, my dictum, “You can’t be wrong all the time, either.”

  26. Saint Paul, appointed by… Jimmy Carter; which demonstrates, if nothing else, my dictum, “You can’t be wrong all the time, either.”

    When you look back at the economic turmoil of the 70’s, it is also possible to note the ground work being built to create a recovery, and sustaine a healthy economy, from deregulation, to the Fed’s efforts to whip inflation, to tax reforms meant to stop the punishment of productive activity, and most of this occurred before Reagan was elected and many Democrats like Bill Bradly were fiscally sane.

    Any signs of any of that in the current crises? Nope.

  27. I’d be the first to admit that people are generally stupid, but I’d venture to say that 99% of Americans know that the Fed inflates the value of the currency. So we already KNOW what the Fed’s doing.

    That’s why people decide to buy things that are a better store of value. Like real estate.

  28. nice post…
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