Saturday, March 28, 2009

Independent No Longer?

When the Fed was created as an independent agency, the intent was to insulate it as much as possible from being a pawn of either the congress or the executive. Fed independence was assured because after being appointed by the president and confirmed by the senate, Fed governors cannot be fired - only impeached. Also the Fed is self financing and isn't dependent on budget appropriations. Lastly the Fed chairman's term does not coincide with the president's making a new president wait two years before a new fed chairman can be named. This independence has historically served the country well. The Fed has often taken policies that were opposite that of the congress and the president to ensure price stability in times of congressional largesse. Go back to your history books and read about the Treasury Accord during the Korean War for an example. However, Fed independence waivered when Alan Greenspan endorsed George Bush and the republican congress' spending spree that increased the federal budget by $1 trillion. To finance that surge in spending without increasing taxes, the Fed bought treasury bills through its open market desk. The result was persistently low interest rates which led to the housing boom and the rest is history.

The Bernanke Fed has followed Greenspan in its complicity with the congress and the executive spending spree only it has done one better. In addition to aggressively engaging in open market operations with the public, it has also bought treasurys directly from the Treasury, and purchased $2 trillion and counting in asset-backed securities. The question is why? Why is the Fed acting in concert with the president and congress? Isn't it curious that if borrowing and spending got us into this mess, that the Fed would endorse a policy of more borrowing and spending rather than fiscal restraint? The only answer I can come up with is that Bernanke wants to be reappointed to another four year term as chairman. If he exercises his independence, then Obama would likely appoint some else, like Larry Summers, who is one of the chief architects of this financial irresponsibility.

What makes Bernanke's actions so troubling is that the Fed, being independent, is also not accountable. It refuses to reveal who it has loaned to and what amount. Congress can change all this by changing the Federal Reserve Act. Maybe it is time to do just that. In that manner at least the public will be informed as to what its government is doing. Lastly, Bernanke's complicity, the incredible surge in bank reserves, the monetizing of the national debt have led me to conclude that it is time to take money creation out of the hands of the Fed. Do I hear "gold standard"?


Mark Herpel said...

Three cheers for a gold standard, but why wait for the Federal Gov. to do it? There are at least 6 states that currently have pending "Sound Money" legislation which would allow/permit/require the state gov's to accept gold and silver, plus digital gold currency. I see this as the road ahead.

Digital Gold Currency Magazine

Anonymous said...

Frighting, sobering...

...and completely rational.

A nice change from the typical financial blog.

Webutante said...

Harold, it's so good to meet you. I would like to link to your blog and stay in touch! Best wishes