Supporters of independence argue that Congressional or other oversight will pressure the fed to pursue short-term goals (boosting output) at the expense of long-term performance (controlling inflation). 16 But these arguments ignore what economists, following Ronald coase and Harold Demsetz, call comparative institutional analysis. 17 Of course, there are potential hazards associated with Congressional oversight, but also potential benefits of stronger governance and greater transparency. For instance, exposing monetary policy (and the feds other controversial actions,. Bailing out foreign central banks) to congressional scrutiny could put pressure on the fed to service short-term political goals, but under the present system, the fed can make trillion-dollar bets without any monitoring and feedback system. Unfortunately, cost-benefit analysis is usually forgotten where the fed is concerned.
Who owns and controls the
If the rpi fed can buy and hold any assets it likes, 15 if it works hand-in-hand with the White house and the Treasury to coordinate bailouts in the hundreds of billions of dollars, if it facilitates trillion-dollar deficits by buying all the treasuries the federal. (And dont forget bank supervision. Even the feds defenders recognize a need to separate its monetary-policy and bank-supervision roles. But as long as the fed continues resume as a bank regulator, shouldnt someone should be watching the watchmen?) Second, and more generally, the fed is a national economic planning agency, and it performs about as well as every national economic planning agency in history. Have we learned nothing from the collapse of centralized economic planning in the eastern Bloc, its demise in China, and its crippling hold on places like north Korea? 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. Why would we expect an organization operating in that environment to improve overall economic performance? The fed is run by men, not gods.
Contrary to a popular storyline that the fed and other central banks prevented financial catastrophe, and made the Great Recession less harmful than it otherwise would have been, the feds actions have made a bad situation much worse, by perpetuating the very structural imbalances that. The problem with the us economy today is hardly a lack of year effective aggregate demand, as keynesian economists like to say, but a structural imbalance brought about by two decades of cheap credit, imbalances the fed is working hard to make permanent (e.g., keeping the. And needless to say, the issue here is not Chairman Bernanke himself, but the impossible situation he faces as Fed chair. Fed Independence, in 2009 a group of economists circulated a petition in support of Federal Reserve independence, and against Congressional attempts to exercise increased oversight and governance. 14 The idea that the fed must be independent of any external constraint and must not be audited, governed, or supervised in a serious manner has become a shibboleth of contemporary macroeconomic policy. But it should be challenged. I declined to sign the petition, for two reasons: First, proponents of Fed independence focus exclusively on monetary policy, as if the feds Congressional critics simply want to know how the federal Funds Rate is set. But the fed conducts not only monetary policy but fiscal policy as well, increasingly so since 2008.
It ignores differences in theoretical frameworks between, say, keynesian, austrian, monetarist, new classical, and other economists. It ignores differences in the interpretation of data, which is a matter of judgment, not intelligence. It ignores the possibility that key decision-makers, including Fed and Treasury officials, have private and conflicting interests. And of course it ignores normative concernssome citizens may oppose rewarding incompetent managers with taxpayer funds, regardless of the efficiency consequences. More generally, mankiws argument would seemingly apply to any and all forms of government economic planning. Why have markets at all, if we can have smart, well-informed shredder planners directing book the allocation of resources? Sadly, mankiw is hardly alone in holding to this worldview. 13, it is the implicit philosophy underlying the institution of central banking. And, to be sure, ben did exactly the wrong things.
Federal Reserve officials are regarded as Platos philosopher-kings. When a group of distinguished economists expressed skepticism in 2008 about what became the Troubled Assets Relief Programthe government rescue of inefficient, badly managed financial firms, harvards Gregory mankiw offered the following response: i know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on blogs and editorial pages about the proposed policy. Moreover, ben is far better informed than the critics. The fed staff includes some of the best policy economists around. In his capacity as Fed chair, ben understands the situation. If I were a member of Congress, i would sit down with Ben, privately, to get his candid view. If he thinks the bailout is the right thing to do, i would put my qualms aside and follow his advice. 12, one can hardly imagine a more dangerous perspective on government decision-making.
Secrets of the federal Reserve - apfn american Patriot
Someone has to be in charge of the tiger monetary system, and during a crisis, leaders have to make tough decisions. If not the fed chairman and staffintelligent, competent, well-trained economistswho else? Who better than the distinguished Princeton macroeconomist Ben Bernanke? Economist Lawrence ball produced an interesting paper in February of this year on the psychology of the chairman. 11, ball traced the evolution of Bernankes thinking between 20, arguing that, since 2008, the bernanke fed has eschewed the policies that Bernanke once supported. Ball attributes to the change in Bernankes thinking to groupthink and to the chairmans own personality, which Ball describes as shy, withdrawn, interview and unassertive.
Without intending to, ball makes powerful arguments against discretionary monetary policy itself, which relies on a small, elite group of powerful technicians, interest-group representatives, and political advisers to design and implement rules and procedures that affect the lives of millions, that reward some (commercial and. Under central banking, there are no rules, only discretion. Do we really want a system in which one persons personality type has such a huge effect on the global economy? Yes, the feds defenders insist. It is vital, they say, that the fed not be constrained in any way from pursuing whatever policies it deems best.
In short, once investments are revealed to be mistakes, it is critical to let the market liquidate the bad investments as quickly as possible to make them available for other purposes. 10, of course, physical and human resources cannot be instantly and costlessly reallocated to alternative uses. However, contracting parties should be allowed to renegotiate resource use without central banks getting in the way. Existing mechanisms for liquidating existing investments and organizations, such as bankruptcy, should be used where appropriate. The fed, working hand-in-hand with the Treasury department under the bush and Obama Administrations, has done precisely the opposite, bailing out insolvent financial institutions and industrial concerns, driving interest rates to zero, and injecting trillions of dollars into the financial systemincreasing the monetary base, for.
In short, the feds philosophy has been to prevent, as much as possible, entrepreneurs from liquidating any bad investments indeed, to perpetuate those bad investments as long as possible. Insolvent financial institutions, rather than go through bankruptcy and reorganization, with poorly performing executives replaced by better ones, have received billions of dollars of free money. Incompetent executives remain at the helm. The fed Has too much Power. The feds defenders acknowledge that its recent actions are controversial. But, they say, that is the nature of the beast.
Federal Reserve : a private jewish Bank Strangling
The feds Performance before and After 2008. My own views on monetary theory and policy derive from the austrian school of Ludwig von Mises,. Rothbard, and other important scholars and analysts. 7, from this perspective, the cause of the housing bubble was not irrational exuberance, corporate greed, or lack of regulation but the highly expansionist london monetary policy of the fed under Chairmen Greenspan and Bernanke. 8, after the dot-com crash the fed turned on the printing presses, increasing the monetary base.6 in 2001,.7 in 2002, and.3 in 2003, while mzm rose.7,.0, and.3 during those years. Greenspan slashed the federal funds rate from.5 in January 2001 to, keeping it at 1 until late 2004, summary a level not seen since 1954. This infusion of credit led to overinvestment in housing and other capital-intensive industries, aided by federal government policies designed to increase the rate of home ownership by relaxing underwriting standards. 9, the correct response to the collapse of Lehman Brothers on September 16, 2008, and Washington Mutual ten days later, would have been to let these insolvent institutions fail and to encourage a massive de-leveraging of the economy and an increase in savings and investment. An economic crisis represents a misallocation of productive resources, and the best policy response is to allow market participants to redirect resources from lower- to higher-valued uses.
Price inflation rewards debtors while punishing savers, just as artificially low interest rates reward homeowners while punishing renters. Instead, market forces should determine levels of borrowing and saving, owning and renting, and entrepreneurial activity. Put differently, the monetary system is so important that it cannot be entrusted to a government agencyeven a scientifically distinguished, nominally independent, prestigious organization like the federal Reserve system. Critics of discretionary monetary policy have argued for fixed rules, such as Milton Friedmans famous recommendation of a fixed rate of money-supply growth, or Professor essay taylors more accommodating set of countercyclical rules. 5, others debate whether inflation targeting or nominal-income targeting is a more straightforward and realistic policy for the fed. 6, however, none of these proposals is as effective as eliminating the monetary authority altogether, and relying on the voluntary decisions of market participants to determine the money supply and interest rates. A commodity standard, for example, removes even the possibility of central government intervention in the monetary system. If rules are better than discretion, the best policy is to eliminate all discretion, and to achieve a monetary standard that is wholly independent of political or technocratic interference.
When it comes to money and banking, in other words, it is essential to have a single decision-making body, protected from competition, without effective oversight, possessing full authority to take almost any action it deems in the best interest of the nation. The organization should be run by an elite corps of apolitical technocrats with only the public interest in mind. And yet, everything we know about organizations with that kind of authority, without oversight, or any external check or balance, tells us that they cannot possibly work well. Just as economy-wide central planners lack the incentives and information to direct the allocation of productive resources, monetary planners lack the incentives and information to make efficient decisions about open-market operations, the discount rate, and reserve requirements. The fed simply does not know the optimal supply of money or the optimal intervention in the banking system; no one does. Add the standard problems of bureaucracywaste, corruption, slack, and other forms of inefficiency well known to students of public administrationand it becomes increasingly difficult to justify control of the monetary system by a single bureaucracy. 4, this is especially true when the good in question is money, the only good that exchanges against all other goods, meaning the good in which all prices are"d. Mismanagement of the money supply not only affects the general price level, but distorts the relative prices of different goods and industries, making it more difficult for entrepreneurs to weigh the benefits and costs of various forms of action, leading to malinvestment, waste, and stagnation.
While i strongly disagree with many of the key policies of the federal Reserve board both before and after the financial Crisis and Great Recession, my argument does not focus on particular actions taken by this or that Chair and board. The problem is not that the fed has made some mistakesperhaps addressed by restating its statutory mandate, scrutinizing its behavior more carefully, and so onbut that the very institution of a central monetary authority is inherently destabilizing and harmful to entrepreneurship and economic growth. A central bank is a government entity in charge of the monetary systeman entity that controls the money supply, in laymans termswith the task of maintaining price stability, achieving a full employment of the economys resources, and other national economic performance objectives. (The federal Reserve system is charged explicitly with achieving both price stability and full employment, the so-called dual mandate now challenged by proposals from Representatives Pence and Brady. 2 ) The fed, like other modern central banks, also serves as a lender of last resort tasked with protecting the financial system from bank runs and other panics by standing ready to make loans to commercial banks, using funds that are created instantly, from. The central banks job, in short, is to manage the monetary system. As such, it is the most important economic planning agency in a modern economy. Money is a universally used good and the loan market, through which newly created money enters the economy, is at the heart of the investment process. Ironically, though economics clearly teaches the impossibility of efficient resource allocation under centralized economic planning, as demonstrated (theoretically) in the 1920s and 1930s by economists such as Ludwig von Mises and.
Frb sf 2014 Annual Report
Introduction, i specialize in the economic theory of organizationstheir nature, emergence, boundaries, internal structure, and governancea field that is increasingly important in economics and was recognized with the 2009 Nobel Prize awarded to Oliver Williamson and Elinor Ostrom. (Ronald coase, founder of the field, is also a nobel laureate). Much of my recent research concerns the economics of entrepreneurship and the entrepreneurial character of organizations, both private and public. Like business firms, public organizations such as legislatures, courts, government agencies, public universities, and government-sponsored enterprises seek to achieve particular objectives, and may innovate to achieve those objectives more efficiently. 1, public organizations, like their for-profit counterparts, may act entrepreneurially: They are alert to perceived opportunities for gain, private or social, pecuniary or not. They control productive resources, both public and private, and must exercise judgment in deploying these resources in particular combinations under conditions of uncertainty. Of course, there are important distinctions between private and public organizationsobjectives may be complex and ambiguous, performance is difficult to measure, and some resources are acquired by coercion, not consent. In the remarks below i evaluate the federal Reserve systemand the institution of central banking more generallyfrom the perspective of an organizational economist.