What Fed Independence?

July 16, 2009

by Jerry O’Driscoll

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.

 

 

11 Responses to “What Fed Independence?”


  1. [...] Cross-posted at ThinkMarkets [...]

  2. Tom Dougherty Says:

    The Open Letter would be better sent to Bernanke himself to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”

    Jerry, I didn’t understand your last sentence, “Apparently the critics are now going to be blamed for the Fed’s inability to extricate itself from its interventions.” Why will the critics be blamed?

  3. Richard Schulman Says:

    Keynesian economics has been debunked for decades now; so have the claims of the Fed to being capable of managing a stable value dollar and not creating periodic economic crises. What has been debunked in theory needs to be buried in reality.

    When are Austrian-school economists going to vigorously make the case — here and elsewhere — that the Fed’s currency monopoly should be ended?

    While there are many different proposals presently in circulation, the best resolution of the theoretical controversies would be to just let currencies representing the various proposals flourish — be they gold or commodity backed, fiat, fractional or 100% reserve-based — and let the market pick the winners.

    Shouldn’t this forum be more active in forwarding this idea, so compellingly motivated by Hayek several decades ago?

  4. Tom Dougherty Says:

    Richard,

    “Shouldn’t this forum be more active in forwarding this idea, so compellingly motivated by Hayek several decades ago?”

    As a reader of this blog, I am glad that the issues brought forth are not strictly regarding free banking or various alternatives to the current monetary system. While I find such discussions interesting, I also like to hear Austrians talking about what is happening right now in our economy. Right now Federal Reserve independence is in jeopardy. This could be particularly damaging to the economy if it leads to high or hyper inflation. Free banking or 100% reserve requirements are interesting topics and should be discussed but I also want Austrian economists speaking out about what is going on right now in the world around them.


  5. My last sentence: The petition suggests that critics may tie the Fed’s hand, making it more difficult to tighten. So if the Fed fails, the critics will be blamed. On competition in currency, I think Austrian economists have written a geat deal.

  6. Richard Schulman Says:

    Tom Dougherty writes: “Free banking or 100% reserve requirements are interesting topics and should be discussed but I also want Austrian economists speaking out about what is going on right now in the world around them.”

    Well, yes, I do too, but I believe that need is being adequately addressed, here and elsewhere.

    What is not being addressed is (1) how to get from here (a Fed monopoly of bad money) to there (competing currencies) and (2) theoretical articles developing the pros and cons of different ways of achieving this result. Right now, the Fed-based monetary system is accepted by the Establishment as eternal and unchallengeable, something that can be reformed around the edges but not overthrown. That has to change. If not now, when? If not you guys, who?!!


  7. Richard Schulman raises a big issue. Adam Smith argued that states spend all revenues in ordinary times, and then must run deficits in extraordinary times. In his day, it was mainly wars that led to deficits. Today we have entitlements and financial bailouts on top of costly wars. Central banks are needed to finance the deficits. Ultimately it is a question of the size and scope of government in society.


  8. [...] Gerald O’Driscoll has joined the “What Federal Reserve Independence?” bandwagon.  I’m happy to welcome him [...]


  9. [...] was invited to sign the Open Letter in support of Fed independence but, like Jerry O’Driscoll, Bob Higgs, and Larry White, I don’t support the cause. Follow the links above for detailed [...]


  10. [...] Jerry O’Driscoll: 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. [...]


  11. [...] 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 [...]


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