The Importance of Fed Independence

Anil Kashyap and Frederic Mishkin are worried that the Ron Paul proposal to audit the Fed will "cripple policy making":

The Fed Is Already Transparent, by Anil Kashyap and Frederic Mishkin: Under the banner of increasing Federal Reserve transparency, Congressman Ron Paul has sponsored a bill that would subject the Fed's monetary policies to an audit by the Government Accountability Office (GAO). The bill is a veiled attempt to undermine the Fed's independence. If it passes, it will cripple policy making...

Weakening the Fed's independence now might raise the risk of inflation, which would cause borrowing costs to rise and would lower prospects for a strong economic recovery. ...

Fortunately, Congress is considering an amendment to the bill that would prevent the negative consequences of the original Paul legislation. This amendment, put forward by Rep. Mel Watt (D., N.C.) would change the focus of the bill by instructing the GAO to audit the new lending facilities at the Federal Reserve that were authorized under the 13(3) "unusual and exigent circumstances" clause of the Federal Reserve Act. The 13(3) lending authority, which had not been used by the Fed since the Great Depression, was the basis for many of the most controversial decisions made during the crisis, including the rescue of AIG and the establishment of new lending facilities.

I think one of the problems the Fed is facing is that people do not feel like the Fed is operating on their behalf, they don't think that the Fed's actions are in their best interests, and they don't feel like they have any way to do much about it.

So how could we fix this? One way would be to have each party choose a candidate for Fed chair during presidential election years, and then have the public vote for the candidate of their choice at the same time they pick the president (but this seems likely to mimic the presidential outcome independent of the particular candidates). The Fed governors could all be elected in this way, and then serve their usual 14 year terms without the possibility of reelection. The hope is that this would give voters some sense of control over the process.

I don't think that proposal is all that good, but the point I am trying to make is that one of the Fed's most valuable attributes, its independence, also causes the public to feel as though it has very little say in how policy is conducted, and this leads to distrust of the Fed's motives and actions. Why should the fate of the entire economy be decided by twelve people who aren't accountable to anyone? If we can somehow get the public more vested in the process without sacrificing the Fed's independence, that would be helpful. But most of the ways that I can think of to implement accountability through the ballot box also undermine independence, and for me independence is an important attribute to preserve.

Comments

[JohnIsOld:]

Your attempt to tweak a broken system misses the point. The point is the Fed causes inflation/deflation cycles and has been politicized by following the will of Barney Frank to buy the debt of fannie/freddie even though that is not in the Fed's charter.

The free market can work this out by simply allowing liberty & freedom by repealing the legal tender laws that prohibit competing money. Let the people decide which money they want to use, and people will run away from the Fed's Reserve Notes (Note == Debt).

Nov 11 11:57 AM

[Elmo Z.:]

As a taxpayer, I have the right to know who the Fed loaned my money to and at what rate of interest.
Can you possibly imagine a company arguing it didn't need a good thorough audit because that might drive its share price down?

That is exactly what the Fed is doing. Trust us. We have secretly cut billion dollar deals with our cronies and you as a taxpayer are not to question our actions.
It is ridiculous and a slap in the face of a republic whose Founders created Congress to only deal in sound money.

Nov 11 12:40 PM

[DDG33:]

The FED has been a dismal failure in its mission to maintain the value of the dollar and prevent major swings in the economy. The historical record adequately demonstrates this failure. The actions and policies of the FED are the primary cause of the loss of value in the dollar and lie at the root of the booms, busts, bubbles and recessions we have all experienced. They have manipulated the money supply for the benefit of politicians that want to spend without restraint, burdening the nation with an almost unimaginable debt (officially 12 trillion this week – and with future obligations closer to 76 trillion), and engineered the monetary system for the benefit of the major financial institutions at the expense of the citizenry.

The dollar only has a fraction of the purchasing power it did in 1950, and the succession of boom and bust periods clearly shows the efficacy of the FED is an illusion.

Additionally, the idea that the FED is independent is preposterous. The only thing of which they are independent is proper oversight and transparency. The pretense that a regular, complete and open audit would threaten the independence of the FED is a red herring meant to scare people who do not know better. The idea that secrecy represents independence is fallacy.

Nothing will change overnight and neither should it. However real change in the manner in which the FED operates and reports its activities is past due. The people must not let the legislation being debated be watered down until it becomes meaningless and ineffectual.

The Fed and its supporters want people to believe the disease is the cure. It is Orwellian and the time has come to pull back the curtains on the wizards.

Nov 11 08:56 PM

[TinyTim:]

"people do not feel like the Fed is operating on their behalf, they don't think that the Fed's actions are in their best interests,"

Guess what? They're not.

Your thesis is that the Fed needs to be independent from government. They are 100% independent of government already. It's the banksters that they are beholden to.

To hell with the Fed. Let Congress (as opposed to the banks) issue it's own money without the banks per the Constitution. Why should taxpayers pay exorbitant fees (interest) to banks to provide a service the Treasury is supposed to do.

The irony is painfully obvious. The one function the government shouldn't outsource is one of the few they do.

Nov 12 03:54 PM

[derryl:]

The 'old' way of dealing with financial crises and banking system insolvency, like the Latin debt crisis of 1982 when 7 of the 8 largest US banks were insolvent, is to keep it quiet to avoid panic and take the measures that are necessary to rebuild the financial system. There was no internet in 1982. Now there is.

It is no longer possible to 'quietly' resolve a financial crisis. Now enough information leaks out that it just looks like the monetary and fiscal authorities are lying to the people, which they are in fact doing when they say, "Everything is ok." Everything is very far from ok. Everything is decidedly NOT ok. The US is in a solvency crisis that could end in a deflationary depression or hyperinflation unless a carefully and transparently pursued middle way can be found.

I don't disagree with Fed monetary easing and government fiscal stimulus to address this balance sheet recession. These measures need to be taken or the US will spiral into a depression worse than the 1930s. But mistakes have been made.

Wall St and its investors needs to suffer some of its losses. Megabankers should be on bankruptcy receivership salaries, not billion dollar 'bonuses' as if nothing has changed. The hyper larceny of investment bank trading has to be publicly denounced as the swindle it is and shut down. Billions of dollars in semi legalized thefts needs to be clawed back.

Economically catastrophic policies like the CRA have to be abandoned and the do-gooder politicians who advocate these financial bombshells should be fired. American voters need to grow up and accept that the only 'entitlement' they should have is the right to try to earn an honest living and pay their own way. A realistic alternative to annual imports of hundreds of billions of dollars of oil needs to be vigorously pursued. Building grand new sports facilities is not 'infrastructure spending". It is unaffordable luxury. Fixing the waterlines and sewers and roads and bridges is infrastructure spending, though there is no glamor in it for pandering politicians.

Fed independence is necessary, though a central bank that is privately owned by a banking cartel is not. At minimum the optics are horrible. At worst the Fed really does serve only the interests of its megabanker shareholders contrary to the interests of the US economy and US citizens. England's central bank was nationalized in 1964. Many countries' central banks, like Canada's, have always been an arms-length property of the government.

A prudent independent central banker is the last line of defense against spendthrift politicians hoping to borrow and spend their way into permanent reelection. It may be a thin line, but it's better than no line at all.

Nov 12 10:56 PM