Fed Gives Cover to Bumbling Congress … Consider the critique of the Fed by some members of Congress. As the New York Times described it, the three-hour hearing was "testy" as "Republicans on the House Financial Services Committee accused Janet L. Yellen, chairwoman of the Fed, of using her office to advance liberal policy goals." – Bloomberg
Dominant Social Theme: Don't give central bank powers to Congress. Legislators will make it much worse.
Free-Market Analysis: We've been covering central banking closely this past week because of the controversy over Rand Paul's Audit the Fed legislation.
This article posted at Bloomberg is yet another in a series of articles that takes a pro-Fed position. Bloomberg has been steadily posting pro-Fed op ed pieces – as we have been reporting in several articles this month.
Among other solutions, Bloomberg has presented the idea that the Fed be given more aggressive audits handled by the GAO. But this editorial makes the case plainly that the Congress ought to stay out of the path of an independent Fed.
I find it rather surprising that the Fed's mandated goals of containing inflation (check!) and reducing unemployment (check!) are deemed liberal. That is how topsy-turvy the partisan world of Washington has become during the past decade.
"You've already made monetary policy a partisan political exercise," declared Representative Scott Garrett, a New Jersey Republican, in a partisan political response to Yellen's House testimony yesterday.
The upside-down worldview that statement reflects seems to be lost on the Congressman. It's an exercise in massive projection. No wonder Congress's approval ratings keep breaking all sorts of record lows.
The trouble with this kind of argumentation is that it doesn't properly represent what's going on. The Fed hasn't contained inflation. It's refused to let large bankrupts implode by handing out trillions along with other central banks. As a result the entire Western economy is going through a slow-motion implosion.
The retrenchment from the 2008 collapse was never allowed to take place. And thus it is still happening as companies collapse gradually instead of quickly and the larger economy continues to struggle against this central-bank induced reality.
As for unemployment, the Fed has not generated additional employment so much as massaged statistics to try to give the impression that the economy is doing better than it is.
Just recently the head of the polling agency Gallup came out and said that the government employment numbers were inaccurate, perhaps purposefully so.
So when it comes to employment, the Fed's reference point is apparently a questionable one. And when it comes to "licking inflation," the Fed can only claim that mantle because it has interfered in the marketplace so significantly that the West's entire economy is still deflating, some five years beyond the advent of the Great Recession.
The article – having presented an initial, fundamental inaccuracy – now goes on to propose a thought experiment designed to make readers understand the problem with giving Congress more power when it comes to central banking.
What might have happened if the Fed actually did what the Tea Party conservatives wanted? Let's imagine in October 2008 that the Trouble Asset Relief Program legislation was amended to include congressional oversight and require approval of Fed action. The result might have been a very constrained Fed response, if any at all. What would have happened, for example, if the Fed were barred from cutting interest rates to zero and ordered by Congress not to reduce them below 4 percent on the theory that doing so would give unjustified aid to underwater homeowners? Or let's suppose there was no quantitative easing, no liquidity injections or none of the various credit facilities established to free up money flow.
The answer comes quickly. The economy would have been even worse, we're told. More employees would have been laid off and mortgage rates would not have moved down so hard. There would have been more foreclosures, more bank failures and real-estate losses generally. "A full-blown depression on a par with the 1930s would have been a very real possibility."
The conclusion of the editorial is that the Fed's preemptive actions, especially its willingness to buy bonds directly in the marketplace, provided an inflationary boost that allowed the economy to "recover" – and thus gave Congress the leeway to continue its posturing.
And so we see a great irony here: the Fed has provided economic cover for Congress to behave badly and engage in childish posturing rather than doing the people's business.
Even the last line or so of this editorial is not really accurate. The bottom line when it comes to regulation and legislation is that sociopolitical and economic rules are inevitably price fixes. As tax collections are at least US$3.5 trillion at this point, that means that Congress interferes in close to one-third of the US economy.
There is a difference between what people choose to do with their money and what people are forced to do with it by law. By now, this process is "price fixing" on a grand scale … and price fixing isn't effective. It causes queues, scarcity and ultimately impoverishment.
When it comes to Fed inflation, one can ask why the central bank continues to be a cherished institution in so many eyes. True, the Fed's actions over the past half-decade have salvaged the "system." But is the system worth salvaging?
Is a desirable system one that collapses every few years, wiping out entrepreneurs, equity and jobs on a massive scale? In the past 20 years or so there have been three major contractions, each one worse than the one before. In the US there are 40 million on food stamps and some 90 million said to be underemployed or unemployed.
The article indicates that the Fed would not have been able to salvage the US economy if Congress were in charge. In fact, the Fed would not have been able to create yet another asset bubble. When this one collapses, the damage will probably be even more extreme.
It's hard to defend the Fed these days, which is one reason, sooner or later, the institution may collapse entirely … along with the US economy it has destabilized for decades.