Federal Reserve “Independence”

22 July 2009 at 2:46 pm 2 comments

| Peter Klein |

I 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 arguments. For my part:

1. The Open Letter focuses exclusively on monetary policy, as if the Fed’s Congressional critics like Ron Paul just want to know how the Federal Funds Rate is set. But the Fed conducts not only monetary policy, but fiscal policy as well, especially during the last 18 months. If the Fed can buy and hold any assets it likes, if it works hand-in-hand with the White House and the Treasury to coordinate trillion-dollar bailouts, isn’t it reasonable to have some oversight? (And don’t forget bank supervision. Even the Fed’s defenders recognize a need to separate its monetary-policy and bank-supervision roles. But as long as the Fed continues as a bank regulator, shouldn’t someone should be watching the watchmen?)

2. The Open Letter itself is poorly crafted, full of unsubstantiated assertions and misleading statements. There’s no argument there, as Higgs emphasizes. Actually, neither the time-series or cross-sectional evidence suggests any correlation between central-bank independence (whatever that means) and economic performance.

3. More generally, the Fed is a central planning agency, and it performs about as well as every central planning agency in history. Have we learned nothing from the huge literature on comparative economic systems? “Independence,” in this context, simply means the absence of external constraint. There are no performance incentives and no monitoring or governance. There is no feedback or selection mechanism. There is no outside evaluation (outside the blogosphere). Why on earth would we expect an organization operating in that environment to improve social welfare? Is this institution run by men, or gods?

Entry filed under: - Klein -, Bailout / Financial Crisis, Financial Markets, Institutions, Management Theory, Myths and Realities.

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2 Comments Add your own

  • 1. Stancja  |  23 July 2009 at 5:38 am

    I belive that we should take small steps. Sure the letter doesn’t cover everything but what can you do? Better this than nothing.

  • 2. Ron  |  27 July 2009 at 2:16 pm

    Join 5,500 plus outraged Americans and sign, comment and promote the Abolish the Federal Reserve Petition to show your displeasure at the real estate and financial meltdown caused to a large degree by easy money policies of Greenspan and the Fed.

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