Accountability Needed at Fed


Nearly 200 economists, mostly academics, have signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”

In defending the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments.

First, “central bank independence has been shown to be essential for controlling inflation.”

Recall, however, that for more than a century before the Fed’s establishment in 1913, the purchasing power of the dollar fluctuated around an approximately horizontal trend line. Despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run. Since the Fed’s establishment, however, the dollar has lost more than 95 percent of its purchasing power. Is this horrible record what these economists consider “controlling inflation”? If so, they have placed the performance bar much too low.

Second, say the petitioning economists, “lender of last resort decisions should not be politicized.”

But what are we to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges and so forth to big Wall Street firms? Were all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, selected and accommodated on purely disinterested grounds? Or may we be permitted to conjecture that institutions such as Goldman Sachs and Morgan Stanley enjoy a tad more political coziness with the government in general and the Fed in particular than you and I and an additional 300 million Americans do?

Finally, the economists declare, “the democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.”

Really? The Fed’s appointment process suggests more the co-conspiratorial character of the ruling governmental and financial elites than anything we might grace with the adjective “democratic.”

And if frequent congressional testimony by Fed officials, notorious for their mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” it’s odd that Sen. Byron Dorgan, D-N.D., should complain: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?”

The lack of Fed accountability has been so outrageous that it has prompted nearly 300 members of the House to support legislation by Rep. Ron Paul, R-Texas, calling for an audit of the Fed.

All in all, the economists’ petition reflects the astonishing political naivete and historical myopia that now characterize the top echelon of the mainstream economics profession.

By now, everybody understands that economic central planning is doomed to fail. The problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, a secretive central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions.

It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.

It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided management, but abolished root and branch before it inflicts further centrally planned disaster on the world.

Robert Higgs is a Senior Fellow in Political Economy at the Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, the University of Economics, Prague, and George Mason University.

  From Robert Higgs
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