JP2010
07-16-2009, 10:27 AM
http://money.cnn.com/2009/07/16/news/economy/myth_fed_independence.breakingviews/?postversion=2009071611
It's always a red flag when so many economists agree on something. At least 175 of them have signed a petition in support of the U.S. central bank's independence. The Federal Reserve's current autonomy is to some extent illusory anyway. Even so, the very appearance of independence is a virtue worth defending.
The assembled economists worry that early in any recovery the Fed will need to restrict monetary policy to head off inflation -- which is unlikely to be popular politically. Meanwhile, the Obama administration has strengthened the hand of politicians who want greater control of the Fed by suggesting the central bank should get sweeping new powers to regulate systemic risks.
There is some logic to these proposals. But lawmakers wouldn't want such a powerful regulator to be completely outside their control. The administration has already offered a quid pro quo, suggesting the Treasury might have to approve the Fed's decisions to use the emergency bailout powers it has employed on several occasions in the last two years. That in itself could be seen as the beginning of the end of the bank's independence.
Yet it's not really independent, anyway. Its bosses are politically appointed -- though traditionally then left alone to do their jobs. No political appointee is entirely oblivious to the way the Congressional winds are blowing. And the Fed's role in the rescues of financial firms like Bear Stearns and American International Group involved lock-step cooperation with the Treasury and other arms of the executive branch.
It's true that when it comes to monetary policy, the Fed needs to be at least a step removed from day-to-day vote-grabbing because its decisions can be politically inconvenient. But even the half-truth of this type of independence didn't endow the Fed, under Alan Greenspan and then Ben Bernanke, with the foresight to head off the massive bubbles in credit and housing that so spectacularly burst.
Fears about the Fed's decision-making if it gathered new powers are justified. And if they can't be allayed, perhaps a separate systemic regulator is a better idea. Either way, though, there's no escaping the fact that the Fed already acts as an instrument of policy -- and in the politically charged role of lender of last resort.
That said, its credibility and effectiveness still benefit from the helpful fiction of independence. If that's what those economists want to preserve, it may be a rare case in which all of them are right about something.
It's always a red flag when so many economists agree on something. At least 175 of them have signed a petition in support of the U.S. central bank's independence. The Federal Reserve's current autonomy is to some extent illusory anyway. Even so, the very appearance of independence is a virtue worth defending.
The assembled economists worry that early in any recovery the Fed will need to restrict monetary policy to head off inflation -- which is unlikely to be popular politically. Meanwhile, the Obama administration has strengthened the hand of politicians who want greater control of the Fed by suggesting the central bank should get sweeping new powers to regulate systemic risks.
There is some logic to these proposals. But lawmakers wouldn't want such a powerful regulator to be completely outside their control. The administration has already offered a quid pro quo, suggesting the Treasury might have to approve the Fed's decisions to use the emergency bailout powers it has employed on several occasions in the last two years. That in itself could be seen as the beginning of the end of the bank's independence.
Yet it's not really independent, anyway. Its bosses are politically appointed -- though traditionally then left alone to do their jobs. No political appointee is entirely oblivious to the way the Congressional winds are blowing. And the Fed's role in the rescues of financial firms like Bear Stearns and American International Group involved lock-step cooperation with the Treasury and other arms of the executive branch.
It's true that when it comes to monetary policy, the Fed needs to be at least a step removed from day-to-day vote-grabbing because its decisions can be politically inconvenient. But even the half-truth of this type of independence didn't endow the Fed, under Alan Greenspan and then Ben Bernanke, with the foresight to head off the massive bubbles in credit and housing that so spectacularly burst.
Fears about the Fed's decision-making if it gathered new powers are justified. And if they can't be allayed, perhaps a separate systemic regulator is a better idea. Either way, though, there's no escaping the fact that the Fed already acts as an instrument of policy -- and in the politically charged role of lender of last resort.
That said, its credibility and effectiveness still benefit from the helpful fiction of independence. If that's what those economists want to preserve, it may be a rare case in which all of them are right about something.