“This quantitative easing keeps long-term interest rates lower and allows the federal government to “pay interest to itself” on a larger portion of the national debt. Also, price stability has been officially defined, in the best Orwellian tradition, as 2% inflation, thereby promising that the real burden of the national debt will decline annually by 2%…

…The Fed assures us that we should not worry about all this. These policies are reversible if inflation threatens, and they were absolutely necessary to counter the financial crisis way back in 2008-2009. History provides ample evidence that the Fed isn’t infallible and doesn’t have a monopoly on monetary-policy wisdom. The fear of this history repeating itself is why proposals such as the Taylor rule, and other guidelines to constrain Fed discretion, are useful to consider.”, Em. Prof. Robert F. Stauffer, Roanoke College, Salem, Va.

“Interest rates are a pricing mechanism, and rates artificially held down for too long lose their ability to send the proper signals vital for maintaining a healthy economy. The Fed’s six-plus years of zero-interest-rate policy have enabled the federal government to add over $7 trillion to the national debt—without causing debt-service cost unsustainability alarms from going off, which would have happened some years ago in a normal interest-rate environment. As a result, the Fed’s policies have increased the nation’s systemic risk of following Japan into an economic coma and unavoidable default.”, Scott S. Powell, Discovery Institute, Seattle

Letters

The Non-Woolly-Minded Fed Critics Make Some Points

An independent central bank: It should prevent free-spending legislators from printing money and buying votes.

Alan Blinder doesn’t mention the major justification for having an independent central bank: It should prevent free-spending legislators and administrators from printing money and buying votes (“Beware of Woolly-Minded Attacks on the Fed,” op-ed, Jan. 28). Ironically, our independent Federal Reserve has become a co-conspirator with Congress in encouraging this type of irresponsible behavior. The Fed is helping to conceal the true cost of deficit spending by keeping short-term interest rates at near-zero levels (for six years and counting), along with the creation of huge levels of bank reserves to purchase government securities.

This quantitative easing keeps long-term interest rates lower and allows the federal government to “pay interest to itself” on a larger portion of the national debt. Also, price stability has been officially defined, in the best Orwellian tradition, as 2% inflation, thereby promising that the real burden of the national debt will decline annually by 2%.

The Fed assures us that we should not worry about all this. These policies are reversible if inflation threatens, and they were absolutely necessary to counter the financial crisis way back in 2008-2009. History provides ample evidence that the Fed isn’t infallible and doesn’t have a monopoly on monetary-policy wisdom. The fear of this history repeating itself is why proposals such as the Taylor rule, and other guidelines to constrain Fed discretion, are useful to consider.

Em. Prof. Robert F. Stauffer

Roanoke College

Salem, Va.

Prof. Blinder is right to worry about congressional attempts to limit the Fed’s independence, but he should also consider the part the Fed has played in this. As our central bank aggressively moves into areas of fiscal and regulatory policy that traditionally were the domain of others, it is transforming itself from a central bank into a central regulator.

There comes a point in every business cycle when money must become more expensive. If the Fed reflexively abhors the image of the bad cop while insisting on all the duties of the good cop, it will inevitably receive political pushback from those who preferred the former arrangements.

Robert Eisenbeis, a former executive vice president of the Federal Reserve Bank of Atlanta, insists in his Jan. 20 letter that the Fed’s purchase of Treasury debt effectively retires that debt. If his view represents orthodox thinking within the Fed, it’s no surprise that Congress seeks to redirect the central bank’s role.

Steve Stein

Larkspur, Calif.

Prof. Blinder seems to suggest that we are unavoidably subject to one crisis after another, and further central bank scrutiny will prevent the remedies the next crisis will require. It is rarely articulated by the people providing such arguments that we ought to attempt to prevent (or at least, try to contain) the next meltdown. My guess is Prof. Blinder was cheering when the Democratic senior senator from New York bludgeoned Federal Reserve Chairman Ben Bernanke a few years ago, practically ordering him to “get to work.” It is about time that our elected politicians, not our appointed central bankers, do the same. The actions you criticize, professor, seem like a good first step.

Paul Corbeil

North Royalton, Ohio

Interest rates are a pricing mechanism, and rates artificially held down for too long lose their ability to send the proper signals vital for maintaining a healthy economy. The Fed’s six-plus years of zero-interest-rate policy have enabled the federal government to add over $7 trillion to the national debt—without causing debt-service cost unsustainability alarms from going off, which would have happened some years ago in a normal interest-rate environment. As a result, the Fed’s policies have increased the nation’s systemic risk of following Japan into an economic coma and unavoidable default.

The fact is the Fed has already lost much of its independence, having come to the end of the line. It cannot cut zero-interest rates further, and additional debt monetization on top of a $4.5 trillion balance sheet is too risky to contemplate. Thus, the Fed’s ability to provide national crisis insurance as the lender of last resort may be as questionable as the U.S. Triple-A rating. Subjecting the Fed to a new independent audit and new rules geared toward restoring normalcy and predictability make more sense now than ever.

Scott S. Powell

Discovery Institute

Seattle

Posted on February 5, 2015, in Postings. Bookmark the permalink. Leave a comment.

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