Is an Independent Fed Better?
Rep. Ron Paul now has a majority of the House of Representatives supporting his bill for an independent audit of the Federal Reserve System. He presented his case at a Cato Policy Forum recently, with vigorous responses from Bert Ely and Gilbert Schwartz.
Now more than 200 economists have signed a petition calling on Congress to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” The petition seems implicitly a rebuttal to Paul’s bill.
Allan Meltzer, a leading monetary scholar and frequent participant in Cato’s annual monetary conferences, declined to sign the petition and explained why: “I wrote them back and said, ‘the Fed has rarely been independent and it strikes me that being independent is very unlikely’” in the current environment.
Cato senior fellow Gerald O’Driscoll adds:
it is not the critics of the Fed who threaten its independence, but the Fed’s own actions. Its intervention in the economy is unprecedented in size and scope. It is inevitable that those actions would lead to calls for further Congressional oversight and control.
One of the lessons here is that once you create powerful government agencies, from tax-funded schools to central banks, there are no perfect libertarian rules for how they should be run. The way to protect freedom is to let people make their own decisions in civil society. Schools have to decide what to teach, offending the values of some parents and taxpayers. The Fed can be independent and unaccountable and undemocratic, or it can be subject to the political whims of elected officials; neither is a very attractive prospect.
What Fed Independence?
More than 250 economists have signed an “Open Letter to Congress and the Executive Branch” calling upon them to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”
Allan Meltzer is not a signatory to the petition and he has explained why not. The Fed has frequently not shown independence in the past, and there is no reason to expect it to do so reliably in the future. Professor Meltzer has just completed a multi-volume history of the Fed and knows all-too-well of the Fed’s willingness to accommodate the policies of administrations from FDRs to Lyndon Johnson’s.
I would add that the Fed’s behavior under Chairman Bernanke breaks new ground in aligning the central bank’s policy with Treasury’s. Much of what the Fed has done, first under Bush/Paulson, and now under Obama/Geithner, involves credit allocation. Since that ultimately involves the provision of public money for private purpose, it is pre-eminently fiscal policy. Central bank independence is a fuzzy concept. If it means anything, however, it is that monetary policy is conducted independently of Treasury’s fiscal policy.
In short, it is not the critics of the Fed who threaten its independence, but the Fed’s own actions. Its intervention in the economy is unprecedented in size and scope. It is inevitable that those actions would lead to calls for further Congressional oversight and control. The Fed is a creature of Congress and ultimately answerable to that body.
The petition raises legitimate concerns about whether the Fed will be able to tighten monetary policy when the time comes, and exit from its interventions in credit markets. But it is precisely the Fed’s own recent actions that raise those problems. Critics of recent Fed policy actions have for some time complained that the Fed has no exit strategy. Apparently the critics are now going to be blamed for the Fed’s inability to extricate itself from its interventions.
Cross-posted at ThinkMarkets
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