STAFF NEWS & ANALYSIS
Is Fed Independence Good?
By Staff News & Analysis - May 01, 2010

Don't Let Financial Reform Politicize the Fed … Maintaining the independence of the Federal Reserve is crucial to keeping inflation low and ensuring economic stability. Congressional interference with the independent decisions of our central bank on interest rates and on other aspects of our money supply would surely spell economic disaster. … This potentially disastrous "oversight" proposal would subject the interest rate policy of the Federal Reserve, along with other Fed actions, to audits by an arm of the Congress, the General Accountability Office. It is buried amid much that is good in the comprehensive bill on financial reform that was passed by the House of Representatives last December. Proposed by Ron Paul (left) of Texas and Alan Grayson of Florida, the GAO audit proposal has more than three hundred co-sponsors in the House. Sponsors Bernie Sanders of Vermont and Jim DeMint of South Carolina have enlisted more than 30 co-sponsors for such broad audits in the Senate, which is moving toward a vote on financial reform. Senate Banking Committee Chairman Chris Dodd of Connecticut does not support the House audit measure, but his energies have mostly been focused elsewhere in trying to cobble together the bipartisan compromises needed to pass a Senate bill. The Obama Administration likewise opposes the House audit proposal. The President's chief economic adviser, Larry Summers, has denounced it. So have numerous economists. – Huffington Post

Dominant Social Theme: Let the Fed be the Fed!

Free-Market Analysis: This article appearing recently at the Huffington Post by James Bacchus, a "former member of Congress," is noteworthy because it musters all the arguments against a Federal Reserve audit and, generally, Fed transparency. While Ron Paul (R-Tex) and others have been calling for an audit of the Fed, various defenders of the Fed's business as usual are mustering any defense they can to retain the "independence" of the said agency.

The main argument boils down to the idea that if Congress exercises more control over the Fed, it will be less effective. One can only dream! With all that's been said and written about the Fed, this is truly a difficult argument to make in our opinion, and one that illustrates the problems that the power elite is having in defending its core dominant social theme – that only a handful of wise old men can "run" the economy or print money in the requisite amounts. Here's some more from the article:

Under current law, the GAO already audits the Fed's stewardship of most of its responsibilities — everything from bank supervision to consumer regulation to payment systems. Why not change the longstanding practice of excluding monetary policy from Congressional audits, and have the GAO audit the Fed's decisions on interest rates, too? Why should the Fed's making of monetary policy be done independently of scrutiny and second-guessing by the duly designated agents of our elected representatives? The question of the need for an independent central bank free from the sway of political influence in determining our money supply is not new to me. Nor is it new to our country.

I [have] read entirely too much American history ever to support any legislation that would limit the necessary independence of the Fed. … During the 1790's, Alexander Hamilton wanted to establish the credit of the new nation and create a climate conducive to investment by creating a national bank. He saw such a bank as the best way to consolidate and finance the national debt, ensure a stable money supply, and spur national growth. Thomas Jefferson and James Madison feared the centralizing tendencies of such an innovation, and doubted its constitutionality.

By "the progressive era," the need for a strong central bank to facilitate credit and to ensure stability for a complex industrial society was compelling. The Federal Reserve Act of 1913 was the signal accomplishment of Woodrow Wilson's "New Freedom" — and a delicate political compromise between Wall Street and Main Street. The debate then foreshadowed much of the debate now. Wall Street wanted a central bank controlled by Wall Street. Main Street wanted a decentralized bank independent of Wall Street. The "progressives" in both parties sought a national banking system under government management that would be independent of both bankers and politicians alike.

The resulting compromise established a Federal Reserve System that was both independent and largely decentralized. Later, during the New Deal, the Congress consolidated the regulatory powers of the Fed in a centralized board of governors, but the essence of the original compromise in 1913 continues to this day. All along, from the Jeffersonians to the Jacksonians, from the agrarian populists to the Southern New Dealers, and from the Wright Patmans of the 1950's and 1960's to the Sanders and DeMints and Pauls and Graysons of today, generations of Members of Congress have railed against the very notion of an independent central bank in a representative democracy.

There is little in [Ron] Paul's recent tome End the Fed that was not foreshadowed in Andrew Jackson's stump speeches in the 1830's. … The raillery of these Congressional critics has rarely been without cause. Certainly it is not without cause today. As Senator Evan Bayh of Indiana has said of the decision-makers at the Fed, "They have not been perfect."

The point we would make about all of the above is that it probably complicates what is actually a simple situation if one understands and accepts economic fundamentals. What the Fed does in setting interest rates is price-fixing. When the Fed "prints" money, it is fixing the volume of money as well. Price-fixing NEVER works. It always distorts the markets, results in a queue or scarcity, etc.

This is a fundamental difficulty for those justifying central banks. It is the reason that we can say with some certainty that central banking is a power elite promotion – because when looked at logically it makes no sense. Someone like James Bacchus can write any number of words justifying central banking, but there is no way to do it. Those involved in central banking are fixing the price of money itself, and guaranteeing that the larger society suffers from terrible booms and busts in the process.

This is not such a hard concept to understand. Central bankers know, we would have to believe, that they are fixing the price of money – and price-fixing inevitably distorts the economy. What do we have then? We have yet another Big Lie, the idea that the fundamental organizing instruments of Western society are not what they seem to be. They seem to be rational instruments of money moderation. In fact, they are very simply engines of price inflation, ones that distort investments, collapse economies and inevitably destroy the middle classes.

Ron Paul is right to want to audit the Fed. There is no doubt, from our point of view, that the Fed has done many things with its easily-created money that people would disapprove of if they knew. At this point, we would have to believe that those who operate the Fed suffered from a kind of terminal arrogance that is giving way, in the 21st century to naked fear that people will find out what has actually taken place.

The other point to make about all this is that the Big Lie of central banking is a pervasive one and shows, in its ongoing presence the extent of the power elite's ability to perpetuate within the larger populace a kind of cognitive dissonance. People believed, and still believe, that the West is oriented around a market economy, yet its central money functions are entirely controlled by a small handful of people.

After Thoughts

Given what we understand about central banks generally, James Bacchus' defense rings hollow to us. He can write all he wants about Fed "independence" – but what is the use of defending the independence of a body that fixes the price of money and causes destructive inflations that can turn into hyperinflations and terrible, endless joblessness. Bacchus' defense of the Fed also reconfirms the Bell's supposition that the power elite is virtually out of bullets when it comes to many of its most fundamental promotions. If the arguments that Bacchus presents are really the best that the Fed and its defenders can do, we would suggest that the 21st century – driven by increasing amounts of Internet truth – are going to be difficult indeed for the elite to navigate with the same kind of success as in the 20th.

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