by Bill Butos
Fed independence has come to mean the absence of operational control by non-Fed entities in designing and implementing monetary policy. It also means a presumption (long asserted by the Fed) that its effectiveness in conducting “business” justifies that it operate under a cloak of secrecy, although one that for several decades has adapted to Congressional and “freedom of information” pressures for greater transparency. The call for greater transparency is a public concern because government and its agencies have the ability to affect us directly and massively. But it does not address the more fundamental question of choices in monetary regimes. Transparency matters only because we have central bank.
Congressman Ron Paul is currently leading the transparency charge with legislation requiring the Comptroller General to provide Congress an audit report on the Fed. But even simply auditing the Fed raises the real possibility of further Congress meddling into monetary policy. We have already seen the cozy relationship Bernanke has struck with the Treasury, first with Paulson and now with Geithner, that has recently blended monetary policy and fiscal policy. Bernake’s assertion earlier this July that the Fed has rejected monetizing government debt is patently and inexcusably false.
A standard argument made by economists supporting Fed independence rests on a classic empirical study by Alesina and Summers (Journal of Money Credit and Banking, “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,” 25:2 May 1993) that found a negative correlation between central banks’ independence and inflation rates. Summers, now chief economic advisor in the Obama administration and pretender to the Chairmanship of the Board of Governors, has yet to distance himself from the Bernanke-Geithner alliance, perhaps suggesting that his empirical results from the 1990s only really apply when the “wrong people” are running the show, a refrain elitists since J.M. Keynes have been eager to embrace.
Unfortunately, the dominant public discussion has centered on “Fed independence” and “transparency,” as if coming to closure on some mythical “correct amount” of independence and transparency would finally resolve our monetary problems. Considerable evidence says such a quest is pointless and even dangerous. What’s missing from the public discussion is a sober analysis and assessment of actual Fed policy and the arguments made by many to eliminate altogether central planning enthusiasms in monetary affairs. Simply relocating central monetary planning from the Fed to Congress or requiring the Fed to be more transparent is not a solution, but clearly a diversion and probably a spur.