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