The Federal Reserve has embarked on a campaign of unsupervised industrial policy to end the country's financial crisis, a move that could undermine its independence, a former top U.S. official said on Saturday. John Taylor, who was under secretary of treasury for international affairs from 2001 to 2005, said the explosive growth of the Fed's balance sheet since September was "unbelievable." "This doesn't really seem like quantitative easing in the sense of finding a growth rate in the money supply," he told a panel discussion during the annual meeting of the American Economics Association. … This concern was echoed somewhat by the president of the St Louis Federal Reserve Bank, James Bullard, who also took part in the panel discussion. He said the close collaboration between the Fed and U.S. Treasury in fighting the crisis could have unintended consequences. "We are blurring the institutional arrangements a little," Bullard said. "I am concerned about independence. Fed independence is very important," he told reporters. – Reuters
Dominant Social Theme: The Federal Reserve's bright and shining light is dimming?
Free-Market Analysis: So various Big Men are concerned about the Federal Reserve's institutional mandate. They are worried that the Fed is losing its independence and will be less effective, or less free, and this will result in … what?
We are supposed to mourn the plight that the central bank finds itself in? Don't think we do. The best thing that could probably happen would be if people in the great country of America decided that their central bank is just as bad as Thomas Jefferson and Andrew Jackson thought it was. Jefferson tried to insure that America would never be saddled by a central bank and Jackson even shut one down. Of course, the American Federal Reserve probably won't be shut down anytime soon, though if things keep going they way they are, the Fed will come in for some serious questioning – or at least more of it.
The Fed, like all central banks, is an anomalous institution. It is supposed to be an "inflation fighter" but its very existence guarantees the very inflation it is supposed to combat. The Fed's mandate is to generate maximum employment and stable prices, but employment can be ramped up along with the money supply, and this in turn gives rise to unstable prices – so these two mandates are at least somewhat incompatible.
Let us summarize then: The Fed is an inflation fighter, but its very mechanism, the unlimited production of money, virtually guarantees inflation. The Fed is supposed to promote maximum employment, but to do so it needs to expand the money supply, creating a boom that inevitably leads to a bust – and unstable prices throughout the business cycle, the Fed's other supposed mandate.
This is why we don't take the expressions of concern by those clustered around the blessed money fount of the Fed very seriously. The Fed is going to lose its independence? In fact, the raison d'etre of the Fed, and of central banks in general has nothing much to do with independence in our opinion, and much more to do with power. "The man who controls the money supply controls the Empire," a famous banker once said.
The very idea that billions of people around the world slave away for pennies and dollars a day while central bankers can whip out trillions if they think they need to do so is profoundly anti-democratic and anti-free-market. Central banks like the Fed are supposedly a mechanism of the marketplace, but in fact they are money monopolies and have nothing much to do with capitalism.
In fact, there likely will be little left of the Federal Reserve's current reputation before the economic crisis is over. This goes for other central banks as well. These entities have been set up supposedly to ensure the health of Western economies, but now they have all-but-collapsed, stock-markets have been shown to be unstable and the entire inflationary structure of civil society has shown itself to be nothing more than a kind of empyrean Dreamtime. Pensioners wind their lives away at various nondescript jobs including those in dysfunctional public school and health care facilities, invest their wages with unstable conglomerates and then seek to retire, only to realize that their assets are forfeit and their savings indeterminate. Within this context, concern over central banking independence strikes us as somewhat beside the point. The system needs to be dissected, not defended.