The original Federal Reserve Act dictated that, in selecting members of the Board of Governors, “The President shall have due regard to fair representation of the financial, agricultural, industrial and commercial interests, and geographic divisions of the country.” How is it, then, over 100 years hence, that the Fed has been overrun by academic economists? This critical question must be boldly addressed by the new administration and Congress.
Danielle DiMartino Booth has written a book that is highly critical of the Federal Reserve and we covered it yesterday.
But now we have seen an article from her directly, and it provides us with a chance to comment on her analysis and insights more intimately.
Booth does NOT call for an ending of the Fed, certainly not in this article, though she wants large changes.
Her analysis makes a lot sense but her solutions would still leave the Fed standing and making rate decisions.
With (uber regulator) Daniel Tarullo’s departure, a majority of positions on the board are vacant or will be open imminently. The opportunity to reinvent this incredibly powerful institution, which has become the de facto unelected fourth branch of the U.S. government, and restore it to what was originally conceived, is finally at hand.
President Trump will have the opportunity to fill five or six of the seven seats on the Board of Governors of the Federal Reserve. Economists certainly have their place around the table, especially those who defy the mainstream and accepted orthodoxy. But vigilance must be exercised in creating an intellectually diverse board filled with those who study the economy and those who create economic activity. An overabundance of similar thinking has poisoned the monetary policymaking process.
This is what Booth wants to end: the takeover of the Fed by academia. That’s why Ben Bernanke and Janet Yellen are singled out for special criticism. They are both what Booth hates, detached academics who prefer theory to reality and run — or ran – the Fed as if Keynes were neither dead nor discredited.
She would give the Fed to realtors and others who have real time experience with rates and economic matters. And there are other issues. The West is now a good deal more dominant than the Midwest. So the West should have more impact and the Midwest should have less.
She wants to switch the number of votes around so that Fed offices across the country will have “equal standing to that of the existing permanent votes of the New York Fed and the seven D.C.-based members of the Federal Reserve Board.”
Taking power away from Washington and New York will depoliticize the Fed and remove some of Wall Street’s influence as well.
There are redundancies she would remove throughout the Fed that would save massive amount of money.”Take all of that money that’s been saved and invest something that would have helped the Fed see the financial crisis coming.”
She suggests building a single regulatory entity that would regulate and supervise banks around the country. And once you’ve created this new enterprise, don’t leave it entirely alone.
She sounds positively giddy about this version of the Fed. And yet, as we mentioned yesterday, the fundamental issue of price fixing is not addressed.
The Fed sets short term rates which in turn influence long term ones. If she wanted to, Yellen could probably bring the country to a screeching halt by raising rates high enough, the way others did before her.
Again, the Fed sets these rates, and so long as the Fed has the power to raise and lower rates independent of market forces, the Fed will guess wrong and the economy will go continually downhill.
Booth has obviously written a book that many quasi-critics of the Fed like. It makes many suggestions to make the Fed work better. Yet the main focus of the book needs to be on the lack of the ability of the Fed to manage rates, and in this article and probably in the book she tries to give the Fed ways to manage rates better when the Fed ought not to be managing them at all.
Because she does not call for a whole-scale scrapping of the Fed, the book is having success. If she really did what is necessary – call for the end of the Fed in a committed and unyielding way – she would have a much better book but she wouldn’t be able to rub shoulders with the myriad of the Fed’s quasi-critics.
In fact she would be put on fake news lists, as we and others have been.
It is these quasi-critics who comprise most of the Fed’s public, formal criticism. They will go just so far and no further. They don’t deal with the bottom line issue which is that the Fed was never developed to help people build a better economy. It was created to give a few London, City bankers enormous and secret control of the money of the most powerful nation in the world.
There is nothing the Fed does, from regulation, to analysis, to fixing rates, that is worth replicating or saving.
Conclusion: God help us. The last thing we need is a more efficient Fed.