Hi all, new to the list, and already being opinionated. :) The author doesn't do a very good job of presenting the arguments of the "Fed bashers," so I thought I'd chime in. Those opposed to the Fed are opposed for three major reasons:
1. Legality -- The Fed's position as a creator of fiat money that is not under the authority of any branch of government and can't be fully audited contradicts some language in the Constitution (art. I, § 8, cl. 5.; art. I, § 9, cl. 6.). This is perhaps the weakest of the three arguments, as all three branches of government violate the Constitution day in and day out and no one seems to mind. 2. Morality -- The Fed is often said to be "waging a war against inflation," when in fact the Fed is the only possible cause of monetary inflation, as it controls the money supply. Inflation is precisely a sinister form of tax by which the Federal Reserve (by issuing credit and buying various instruments with money that didn't previously exist) steals value from its constituents' savings. The Fed thus discourages saving money, and (especially through below-market interest rates) encourages spending. Inflation is an invisible tax without representation, as long as Congress is not allowed any monetary power. 3. Economic merit -- The strongest argument of the three. The Federal Reserve is the primary cause of the current recession, and by its very nature causes asset bubbles. It does this in two primary ways. It sets lower-than-market interest rates, which cause more borrowing to be done than would be done under a free-market system, causing malinvestment (as seen in the dot-com and real estate bubbles). Secondly, it implicitly guarantees debt, which creates moral hazard, allowing banks and other financial institutions to make investments that would not be possible without this guarantee--which again causes malinvestment and results in asset bubbles. The author actually praises the Fed for these flaws: The Fed pumped out more than $1 trillion in new credit, created special lending programs to support faltering segments of the credit markets (commercial paper, money market funds) and rescued financial institutions, notably AIG, whose bankruptcy might have triggered a chain reaction of failures. It's hard to imagine the kind of economic thinking that would see trillions of dollars of inflation and call that a good thing. Not to mention the government subsidy (with taxpayer money, through inflation) of segments of our economy that contributed to the malinvestment. In a healthy economy, dying industries *must* be allowed to die so that others that don't yet exist may be born (see horse-and-carriage argument). Well, that turned into an essay. Sorry about that! -Kevin On Mon, Nov 30, 2009 at 10:52 AM, <[email protected]> wrote: > *WPost* > > *Fed 'reform' we don't want > * > > By Robert J. Samuelson > Monday, November 30, 2009 > > Ever since its creation in 1913, the Federal Reserve has grappled with a > daunting political contradiction. The Fed is charged with preventing the > collapse of the banking and financial system, whose health is essential for > the "real economy" of production and jobs. But financial bailouts usually > occur when mistakes or misdeeds by bankers and investment professionals make > them public pariahs. To do its job, then, the Fed protects -- or seems to > protect -- an unpopular, disgraced and undeserving group. We are now > witnessing this contradiction in full bloom. > > The Fed has become a congressional scapegoat for assorted economic > frustrations: 10.2 percent > unemployment<http://www.washingtonpost.com/wp-dyn/content/article/2009/11/06/AR2009110600555.html>; > expensive rescues of fragile financial institutions (AIG, Bear Stearns, > Citigroup); outsize Wall Street bonuses; and the crisis itself. The > denunciations transcend rhetorical outbursts. The House Financial Services > Committee recently > voted<http://pogoblog.typepad.com/pogo/2009/11/house-financial-services-committee-passes-paulgrayson-amendment-to-audit-the-fed.html>to > require the Government Accountability Office (GAO) to "audit" the Fed's > monetary policy -- its efforts to influence interest rates and credit > conditions. In the Senate, Christopher Dodd, chairman of the Banking > Committee, has > proposed<http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html>stripping > the Fed of all powers to regulate financial institutions -- its > actions to police lending and management practices. These powers would go to > a new agency. > > The Fed backlash is bipartisan. Rep. Ron Paul, a Republican and > libertarian, proposed the GAO audit, which he sees as a first step toward > abolishing the Fed ("End the Fed" is his latest book). Paul favors > resurrecting the gold standard and combining it with private money; Wal-Mart > could issue currency. His views are long-standing, principled -- and wholly > impractical. Dodd, of course, is a Democrat. Much Fed-bashing simply > indulges Congress's impulse to blame someone else for anything unpleasant. > > Lost in this politically charged climate is the reality that the Fed, more > than any other government agency, arguably stopped last fall's financial > panic from becoming a global depression. The Fed pumped out more than $1 > trillion in new credit, created special lending programs to support > faltering segments of the credit markets (commercial paper, money market > funds) and rescued financial institutions, notably AIG, whose bankruptcy > might have triggered a chain reaction of failures. These were > seat-of-the-pants responses, taken in the midst of crisis and pervasive > uncertainty. We will never know what might have happened without them. The > second-guessing is occurring now when there's less fear and more > information. > > What's also overlooked is that the Fed isn't the super-secretive, > unaccountable agency of political stereotype. In 2009, Fed officials from > Chairman Ben Bernanke on down have testified 32 times before congressional > committees. The Fed makes detailed disclosures about its policies. After > every meeting, the Federal Open Market Committee (FOMC), the key > decision-making body on monetary policy, issues a statement explaining why > it has -- or hasn't -- changed its interest-rate target. Until 1994, there > were no announcements after FOMC meetings. Economists and investors had to > guess. > > Contrary to conventional wisdom, the Fed's activities are already widely > audited. Deloitte & Touche examines the Fed's financial statements, which > are published. The GAO can audit many Fed activities, including its banking > regulation and supervision of the payments system. What it's barred from > auditing is the conduct of monetary policy, including relations with foreign > central banks such as the European Central Bank. > > Congress has so far sensibly put this off limits. "Audit" has a different > meaning in the context of the GAO than in everyday usage. It means *examine, > investigate, evaluate* and, often, *criticize*. It's not just crunching > numbers. The GAO usually undertakes studies at the request of someone in > Congress. This suggests that the GAO could be used to influence or > intimidate the Fed through selective investigations, which would involve > access to internal Fed documents and interviews with policymakers. The Fed > might be pressured to finance government deficits or to adopt an "undue > focus on the short term," Vice Chairman Donald Kohn > testified<http://www.federalreserve.gov/newsevents/testimony/kohn20090709a.htm>before > Congress on July 9. Historically, similar pressures have caused other > central banks to unleash inflationary torrents of money, Kohn said. > > This is not inevitable, but even the impression that the Fed's > "independence" is compromised could perversely undermine confidence in the > dollar, leading to higher market interest rates or a rapid fall in the > dollar's foreign exchange value. Massive projected government budget > deficits compound the psychological damage. Similar objections apply to > Dodd's proposal to end the Fed's power to examine and regulate financial > institutions. If this crisis teaches anything, it is that the Fed needs to > know more -- not less -- about large financial institutions. > > The Fed isn't infallible. Its mistakes contributed to the crisis. Its > present low-interest-rate policy poses dangers of fostering inflation or new > "asset bubbles." But the congressional Fed-bashing poses greater dangers. > Ironically, the destructive remedies being peddled are part of "financial > reform" legislation. If this is "reform," we're better off without it. > > > _______________________________________________ > Centroids mailing list: [email protected] > http://radicalcentrism.com/mailman/listinfo/centroids_radicalcentrism.com > Archives at > http://radicalcentrism.org/pipermail/centroids_radicalcentrism.com/ >
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