November 15, 2010
Fed Up with the FedBy Mark W. Hendrickson
It is time (as it has been for decades now) to rethink the role of the Federal Reserve Bank. An article of this length is insufficient to examine all the problems associated with the Fed, so I will concentrate on three problematical areas:
1) Its record is abominable.
2) Its current policies are misguided and counterproductive.
3) It has become dangerously powerful.
First, its record: When Congress created the Fed nearly one hundred years ago (1913), its stated mission was to smooth out the disruptive ups and downs of the business cycle, to stabilize the banking system, and to protect the viability of the U.S. dollar.
Since the Fed opened for business in 1914, there have been numerous boom-bust cycles, with the Great Depression, the stagflationary 1974-82 period, and the current "Great Recession" being particularly severe.
Under the Fed's policies, bank failures have occurred in alarmingly high numbers.
In the century before the Fed's creation, the purchasing power of the dollar, while subject to the inevitable fluctuations of a market economy, had approximately the same purchasing power in 1914 that it had had in 1814. Since 1914, more than 95% of the dollar's purchasing power has eroded. Money is supposed to function as a store of value. By that standard, the Fed's ward, the Federal Reserve Note, has been a miserable failure.
Second, its current policies: The Fed's second round of "quantitative easing" (QE2) continues its long tradition of bubble-creating inflationary policies. In support of QE2, the Federal Open Market Committee's Sept. 21 statement asserted that price inflation was too low, citing the official Consumer Price Index.
People living in the real world may disagree. The Commodity Research Bureau's food index has risen 27% in the last year, cotton is at a 145-year high, and oil and gasoline prices have made double-digit gains. Don't look now, but the costs of eating, driving, and wearing clothes are trending higher at the very time the Fed plans to inject hundreds of billions of dollars (or trillions, if needed) to prop up Washington and Wall Street.
It may be tempting to make Fed Chairman Ben Bernanke the bogeyman for the Fed's inflationary policies. Indeed, sitting at the controls of the inflationary spigot, Bernanke bears some of the responsibility, but not all. A significant portion of the problem is systemic, not personal.
The 1970 amendments to the Federal Reserve Act state that the Fed should "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." These goals are misguided and unattainable:
A) The premise that the central bank can promote employment is erroneous. It is based on a mythical academic theory called the Phillips curve that posits a trade-off between inflation and employment. Unemployment is fundamentally a price problem, not a monetary problem; therefore, unemployment can be cured only by the presence of a free market in wages. Employment is not the responsibility of a central bank.
B) Central bank tampering with interest rates is the fundamental cause of the artificial boom/bust cycle; thus, the Fed or any successor institution should forever cease from tampering with interest rates.
C) Finally, "stable prices" are a chimera. Markets need flexibility in prices to balance supply and demand.
It's time to scrap the Fed's current mission statement. The sole mission of a central bank or monetary authority should be to preserve the integrity and consistency of the monetary unit. That means a return to constitutional money -- honest money. That won't be practical until we have constitutional, honest government. This doesn't appear to be imminent.
Third, the Fed's power: The chairman of the Federal Reserve System is often referred to as the second-most powerful person in the country. In a democratic republic, should the second-most powerful person in an official position be unelected?
It is anomalous that there should be such a powerful, unrestrained institution as the Fed in our body politic. Its awesome, arbitrary powers make a mockery of constitutional checks and balances and pose a threat not only to our money, but to liberty itself.
Not only is the Fed insulated from accountability to the voters, but that very unaccountability may be unconstitutional. The Constitution designates the people's elected representatives as the guardians of their money ("Congress shall have Power ... To coin Money, [and] regulate the value thereof ... " - Article I, Section 8). Indeed, Thomas Jefferson noted in 1791 that Congress has no authority to create a bank and give it a monopoly over our money, because such actions "are not among the powers specially enumerated" in the constitution.
Almost thirty years ago, I spoke with a young congressman (later the governor of his state) after he had given a talk in which he asserted that Congress' hands were tied, in terms of economic policy, by the Fed. I responded that at least in my universe, the creator controls the creation, and that since the Fed was created by an act of Congress, it could be reformed or abolished by an act of Congress. This made the congressman visibly uncomfortable, and he fell silent. Clearly, he had no stomach for challenging the Fed.
Indeed, the events of the last few years have shown that the Fed's powers continue to expand. It now has free hand to create however much money it wants and buy whatever financial assets -- whether government or private or even foreign (this happened during the Greek financial crisis earlier this year) -- it chooses. Even the Inspector General for the Federal Reserve, who is supposed to exercise oversight over it, has been left in the dark. Check out this astonishing congressional testimony.
Rep. Ron Paul has been trying for years to persuade his fellow congressmen to order an audit of the Federal Reserve, and every year a majority of congressmen decline to take this simple, prudent step. This is the same Congress that routinely demands microscopically detailed access to the financial records of private-sector American corporations.
Why the double standard? Are they afraid of the Fed? Or is it that they view the Fed as an important accomplice, an enabler of their plans to expand the power of government by bleeding wealth away from private citizens via inflation?
Either way, I hope the tide of public opinion has turned enough to force an audit of the Fed. Then we can move on to reforming it. Ultimately, I hope we abolish this destroyer of wealth, but there won't be sufficient public support for such a radical move until after the Fed's inflationary time-bombs blow up the wealth of the middle class. Only then may the time be ripe for a return to constitutional money, constitutional government, and freedom from an unaccountable, arbitrary, and destructive central bank.