Thursday, August 26, 2010

On the Fed

Lately I've noticed the competing critiques of the Federal Reserve, and how they do and don't match up.  Almost everyone agrees that the Fed is not politically (or democratically) controlled to the correct degree, though there is no consensus as to whether there is too much politics or too little democracy.

One of the oddities of the Fed is that the term "the Fed" doesn't always seem to mean the same thing.  Sometimes it means the Federal Reserve System, sometimes it means the Board of Governors, and I've often suspected that sometimes it means the Open Market Committee.

This of course provides fertile soil for confusion, and confusion in turn is fertile soil for conspiracy theories.  Righty critics who loathe inflation can point out that "the Fed" consists entirely of political appointees.  Lefty critics who hate interest can point out that "the Fed" is mostly private moneyed interests.  "Private moneyed interests" is the lefty term for what the rightys call the free market; "political appointees" is the righty term for what the leftys call democracy.

Both sides are correct in pointing out that the public is largely ignorant of the important matters of monetary policy.  From that it does not follow the critics are not themselves ignorant, or guilty of causing ignorance.
Here is a multipage article on the Federal Reserve which does not mention the Board of Governors a single time.  Sort of like listing all the important people on a baseball time without mentioning the manager, or even noting that the job of manager exists.

Is that a surprise?  It was to me, because I'm used to reading Austrian-school (anti-politics, anti-inflation) critiques of the monetary status quo.  The linked article is quite the opposite - it is an anti-interest critique, and it wouldn't grind the proper axe to point out that the President's political appointees can effectively raise taxes at any time simply by expanding the money supply.  The article also laments the lack of Congressional control, without noting of course that when the Presidential appointees forming a majority on the Open Market Committee vote to expand the money supply, it is Congress whose spending power increases.

What the article is essentially saying is that it would be better to have a system in which the entity that controls the money supply also benefits directly if the money supply expands drastically.  While I hope it's clear that I don't agree, I am not sure that the entire slate of reforms the Austrian school proposes is necessary.  I'm not sure why it is necessary to abolish the Fed entirely, instead of simply repealing the legal tender laws and banning government seizures of precious metals.  It seems like that would provide quite enough "free banking" without eliminating the important networks maintained by the Federal Reserve System.


Justin said...

You clearly know more about the "inner workings" of the Fed that I, thank you for this summary.

My critique is that by basing the system on Presidential appointees, it only serves to amplify the influence that the money powers have over government. In short, by buying off one man (the Pres) and a few key other men (committee heads and key confirmation votes), the Moneyed Elite can retain an absolute choke hold over policy and potential reform.

Thus we see the incredible incestuousness of the current climate, in which Goldman Sachs insiders, for example, are simple recycled throughout the system, which, not coincidentally, is used to advance their interests. "Too big to fail" and whatnot, essentially resulting in "Socialism for the rich, harsh capitalism for the rest".

If monetary policy makers were subject to popular approval, it stands to reason they would be more likely to enact policies which benefitted the general populous. I fail to see how that would be worse than now, a situation in which the general population is fleeced for the enrichment of the banking elite.

Olave d'Estienne said...

This is a good point, and I think the all-Presidential-appointees nature of the Board of Governors is one of the few ways in which our system is too rigid. I suspect (though I'm not sure) that the courts would actually consider it unconstitutional for Congress to elect them, since they're not among the entities that Article II allows to pick officers.

I think a decentralized public system would have been better than a Federal one. The Constitution forbids states from coining money, but I'm not sure if a non-profit bank controlled by multiple states would be similarly forbidden, particularly if you put a Federal icing on the cake.

Say, create a three-member Board of Governors with the usual long, staggered terms. Set a precedent early on for particularly forceful advice, and hard-won consent, on the part of the Senate. The Board would have regulatory and oversight powers, and be a (small) part of the money-supply-determining committee, composed of all 12 Federal Reserve Bank Presidents.

Have each of the 12 FRB Presidents elected by the legislature of a state selected from within the region on a rotating and shuffled (randomized with no repeats) basis. Each President would serve a term equal to the number of people in the state's Congressional delegation, in months. There's no way the banks could buy all those legislators, partly because they wouldn't know in advance which state to buy.

Furthermore, the resulting committee would have little incentive to hyperinflate because in doing so, they would be sending newly-minted money not to themselves, but to the Treasury (through the purchase of Treasury securities) and thus to Congress, which as more fiscal freedom when the Fed buys/lends/gives it money.

Just a thought.