Fed “Independence” is a Red Herring

While I’d not go so far as the author in saying the Fed has done a terrible job (it truly hasn’t), I’ve already alluded to somewhat comparable questions about the Fed’s dual mandate. Whatever the structural considerations are, evidence has mounted that the FRB is not as independent as proponents claim.

Whether or not this is a good thing appears open to debate. Are independence and accountability somehow irreconcilable?

I don’t like political influence affecting my monetary stability but it seems that ship may have sailed.

The Fed’s “Independence” Argument Is False

The House has passed a bill to audit the Federal Reserve. 79% of the American people support a full audit.

In response, the Fed says that an audit would interfere with its “independence”.

However, the Constitution does not empower a central bank. And Congress – which created the Federal Reserve in 1913 and which has the power to create credit and money – certainly has the power to audit, dissolve, or do whatever it likes with the central bank (including stripping it of the power to create credit).

I have previously demonstrated that the Fed has done a terrible job of managing the economy, keeping unemployment low, and regulating banks.

And I have previously pointed out that the the independence argument is a red herring.

Indeed, the whole idea of independence means that the Fed should be shielded from political pressure to artificially pump up the economy with easy money right before elections. Congress never intended Fed “independence” to mean independence from Congressional oversight to ensure that the Fed is acting within its mandate and in the best interests of the country. These are two totally different concepts, and the Fed and its boosters are being disingenuous when they argue that an audit will interfere with independence from pressure to pump up the economy right before elections.

Now, in an interview this weekend with Der Spiegel, Paul Volcker – while trying to support the Fed’s argument for independence – actually undermines it:

SPIEGEL: Lawmakers on Capitol Hill are thinking about tougher controls over the Federal Reserve.

Volcker: I think the loss of independence and authority of the Federal Reserve would be a very serious matter for the United States. Not just in terms of monetary policy but in terms of our place in the world. People look to strong, credible institutions and I think the Federal Reserve has been such an institution. If that’s lost or too hamstrung by legislation I think we will regret it.

SPIEGEL: But is the Fed still the same kind of institution as during your tenure as chairman? Or is it now more of a governmental instrument? The Fed is managing the TARP program and is also buying government bonds.

Volcker: In some sense the Federal Reserve is always an instrument of the government. It is a government body but it is independent within government. But you are right in the sense that part of the concern is that they have involved themselves quantitatively in entering markets and in that process, you are supporting some markets and not others. That is an area in which the Federal Reserve has never wanted to get into and one that most central banks don’t want to get into. If you are going to maintain your independence you have to avoid that. To intervene in particular sectors of the market is not the proper role for the central bank over time. It could be justified only by extreme emergency.

Intervening and supporting some market players (Goldman, AIG, etc.) and not others (Lehman, etc.) is precisely what Bernanke has been doing. Whatever can be said for the Fed in the past, picking winners and losers is “not the proper role for the central bank”, in Volcker’s words. Without an audit, we will never know which “winners” were saved and which “losers” were left to die, or why. Nor do we really currently know which bailouts and other actions were truly performed under emergency conditions – to stave off catastrophe – and which were done to help out financial companies for other reasons.

Moreover, Bernanke gave many billions to private foreign banks and foreign central banks (and see this). Has the Fed been picking winners and losers among countries? Among private banks?

PIECE TRUNCATED – Get the rest at NakedCapital.com