“The audit’s (an independent audit of The Federal Reserve’s monetary policies) goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”…

…History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed’s actions over the last century represent the greatest systemic risk of any financial organization in the world. These actions include the runaway inflation after World War I and the overreaction leading to the depression of 1921; the failure to liquefy the banking crisis of the 1930s; setting off the internationally disastrous great inflation of the 1970s; and more recently stoking a housing bubble while failing to recognize that it was a bubble……Opponents say an audit would threaten the Fed’s “independence.” That’s precisely why it’s necessary. The promoters of Fed independence, which of course include the Fed itself, must believe that the Fed is competent to have the unchecked power of manipulating money and credit, or in a grandiose variation, of “managing the economy.” They must believe that the Fed knows what the results of its manipulations will be, when manifestly it does not. The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power…… The historical argument against letting Congress play a role in monetary issues is that elected politicians are always inflationist, and it takes an independent body to stand up for sound money. Yet now we have the reverse of the historical argument: a sound-money Congress confronted by an inflationist central bank—a Fed that endlessly repeats its commitment to perpetual inflation at its “target” rate of 2% a year. This means prices will quintuple in a normal lifetime. What then?….. “The money question,” as fiery historical debates called it, profoundly affects everything else. It is far too important to be left to a fiefdom Fed.”, Alex J. Pollack, “It’s High Time to ‘Audit’ the Federal Reservce”, The Wall Street Journal (Mr. Pollock is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago, 1991-2004.)

Opinion

It’s High Time to ‘Audit’ the Federal Reserve

Since 2008 the Fed has run vast, and risky, economic experiments without effective congressional oversight.

U.S. Federal Reserve Chair Janet Yellen

U.S. Federal Reserve Chair Janet Yellen Photo: Reuters

By Alex J. Pollock

The calls in Washington to “audit” the Federal Reserve are not for a narrow, bean-counting review of the institution’s financial statements. The audit’s goal is more fundamental: to assure that the checks and balances in a democratic government also apply to central bankers. It means figuring out how our elected representatives can effectively oversee unelected monetary “experts.”

History shows that these so-called experts are prone to destructive inflationary and deflationary blunders, and that the Fed’s actions over the last century represent the greatest systemic risk of any financial organization in the world. These actions include the runaway inflation after World War I and the overreaction leading to the depression of 1921; the failure to liquefy the banking crisis of the 1930s; setting off the internationally disastrous great inflation of the 1970s; and more recently stoking a housing bubble while failing to recognize that it was a bubble.

The Federal Reserve, established in 1913, was a prime example of the dream-world that President Woodrow Wilson imported from the theorists of the German Empire—the notion of government based on the superior knowledge of independent experts that bypasses the messy and undisciplined world of democratic politics. The fatal flaw? The Fed has no superior economic knowledge. It has only forecasts as unreliable as everybody else’s, and theories as debatable. Hence its many mistakes.

Since the Great Recession ended the Fed has been in overdrive. It is running an unprecedented, giant monetary experiment. This experiment includes years of negative real interest rates, the creation of a huge asset-price inflation, and the monetization of real-estate mortgages and long-term bonds. Should the Fed, or anybody, be allowed to carry out such vast and very risky experiments without effective supervision? The correct answer is: no.

Opponents say an audit would threaten the Fed’s “independence.” That’s precisely why it’s necessary. The promoters of Fed independence, which of course include the Fed itself, must believe that the Fed is competent to have the unchecked power of manipulating money and credit, or in a grandiose variation, of “managing the economy.” They must believe that the Fed knows what the results of its manipulations will be, when manifestly it does not. The century-long record of the Fed provides no evidence that the Fed is competent to be entrusted with this enormous discretionary power.

The historical argument against letting Congress play a role in monetary issues is that elected politicians are always inflationist, and it takes an independent body to stand up for sound money. Yet now we have the reverse of the historical argument: a sound-money Congress confronted by an inflationist central bank—a Fed that endlessly repeats its commitment to perpetual inflation at its “target” rate of 2% a year. This means prices will quintuple in a normal lifetime. What then?

Here is the reality: The Fed is a creature of Congress, which created it and has since amended the legislation that authorizes its existence on numerous occasions. In the 1970s, Congress, with Democratic majorities, made two efforts to bring the Fed under more control. In the Humphrey-Hawkins Act of 1978, it required regular reports to Congress by the Fed. These hearings achieve nothing but the Kabuki theater of scripted presentations and sparring over questions and answers.

In the Federal Reserve Reform Act of 1977, Congress defined a triple mandate for the Fed to follow: stable prices, maximum employment and moderate long-term interest rates. The Fed has dropped any mention of one-third of its assignment—“moderate long-term interest rates”—and redefined “stable prices” to suit itself. It tells us in remarkable newspeak that “stable prices” really means prices that always go up.

How is Congress effectively to oversee its creation? Congress is too big and on average not sufficiently knowledgeable to do so directly—that’s why it has committees. But the House Financial Services Committee is also very large, with 60 members, and both congressional banking committees have numerous other difficult areas of jurisdiction, not least being the crisis-prone housing-finance sector.

So I propose that Congress should organize a new Joint Committee on the Federal Reserve. The Fed would be its sole but crucial jurisdiction. All Humphrey-Hawkins reports should be made to this joint committee, and it should have the power to audit whatever about the Fed it deems appropriate.

Such a committee should have a relatively small membership, made up of senators and congressmen who become very knowledgeable about the Fed, central banking, the international relations of central banks and related issues. Like the Senate Select Committee on Intelligence, it should include ex officio members from the leadership, but in this case, from both houses.

“The money question,” as fiery historical debates called it, profoundly affects everything else. It is far too important to be left to a fiefdom Fed.

Mr. Pollock is a resident fellow at the American Enterprise Institute. He was president and CEO of the Federal Home Loan Bank of Chicago, 1991-2004.

Posted on March 23, 2015, in Postings. Bookmark the permalink. Leave a comment.

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