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Friday, November 20, 2009

"Threatening the Fed's Independence"

I agree with this:

Threatening the Fed's independence, by By Alan S. Blinder, Commentary, Washington Post: The Federal Reserve's performance in this ... crisis deserves separate grades. For the early crisis period, from the summer of 2007 until a few weeks after the Lehman Brothers failure in mid-September 2008, the Fed's response was uneven. ... But the Fed deserves extremely high marks for its work since then. It has hit the bull's-eye regularly under very trying circumstances.
In academia and in the financial markets, the overwhelming attitude is: Hurrah, and thank goodness, for Ben Bernanke, who gets kudos for his boldness, creativity and smarts.
But not in the political world. The Fed is extremely unpopular in Congress and is facing hostile and potentially detrimental actions from both sides of the aisle. ... Christopher Dodd ... would clip the Fed's regulatory wings substantially.
Worse, legislation that just proceeded through the House Financial Services Committee could imperil the Fed's ability to conduct an independent monetary policy. With more than two-thirds of the House co-sponsoring the so-called Paul bill, prospects for floor passage unfortunately look good.
The ... bill would subject the Fed's monetary policy decisions and its dealings with foreign central banks to audit by the Government Accountability Office (GAO) -- which normally acts on requests from Congress. Under current law, these aspects of Fed business have been explicitly ruled off-limits (though the rest is auditable).
Is this extension of the GAO's reach, and hence that of Congress, a good idea? If you believe we'd get better monetary policy with decisions made by Congress in open debate, or heavily influenced by congressional opinion, it certainly is. But how many actually believe that? Very, very few. ...
The ... GAO is already authorized to examine most aspects of Fed operations. It can audit the Fed's special financial arrangements for Bear Stearns, AIG, Citigroup and Bank of America -- to name the most prominent examples. ...
But a congressional audit of monetary policy -- remember, the GAO works for Congress -- could easily develop into something quite different. ... It is entirely predictable that some in Congress will be unhappy with the Fed's decisions... Would we welcome a critical GAO audit of monetary policy, which members of Congress could use to browbeat, perhaps even to intimidate, members of the Fed's rate-setting body, the Federal Open Market Committee? ... Would we like Congress to override the Fed's decisions and set monetary policy -- which is its constitutional right? I think and hope not.
An independent monetary policy ... is one of the great and enduring achievements of the Progressive Era. ... Passage of the Paul bill would be a step away from independent monetary policy and a step toward ending the Fed as we know it. That is a step we should not take.

    Posted by on Friday, November 20, 2009 at 01:17 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (13)


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