Making the Fed more accountable
I’ve been very busy recently, and thus confining my posts mostly to Econlog. I have a new example today, discussing David Beckworth’s interview of Steve Horwitz. I also have a new piece at US News and World Report on how to make the Fed more accountable, which may be of interest.
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10. July 2017 at 20:42
Scott Sumner offers sensible suggestions on improving Fed accountability.
I prefer democracy.
Embed the Fed inside the Treasury Department. The Secretary of Treasury, of course, reports the the U.S. President and serves at his pleasure. Voters can give the boot if inflation is too high, or growth too low.
President Ronald Reagan was a fan of the “Fed in the Treasury” arrangement, and publicly said so.
http://www.nytimes.com/1982/09/18/us/reagan-suggests-tighter-control-of-central-bank.html
Reagan’s comments were not a whimsical one-off. Other Reaganauts repeatedly sounded the theme, including Donald Regan, Reagan’s Treasury Secretary.
Forgotten today is the Fed was once a part of the Treasury.
Independent central banks the globe over have proven to be too tight. Some sort of institutional bias is common in central banks, an affinity for bankers, a squeamish hysteria about wages, an insularity.
Have you ever read studies from regional fed banks? There is no topic too esoteric or meaningless to be left unresearched.
They also release documents to the effect that too many people are working in America.
“The labor market has further strengthened and appears to be at or even beyond full employment” — SF Fed June 16
http://www.frbsf.org/economic-research/publications/fedviews/2017/june/june-08-2017/?utm_source=frbsf-home-fedviews&utm_medium=frbsf&utm_campaign=fedviews
Independent public agencies almost inevitably become self-serving, or captured. Or both.
10. July 2017 at 22:06
Benjamin Cole,
I agree with you. I’d rather have monetary policy run by the Treasury so that there’s more political accountability for performance. Of course, we’ll have the occassional misguided administration that will run inflation too high, perhaps even for stupid reasons like trying to boost trade, but perhaps it will help us avoid situations like the Great Depression or Great Recession.
I like your point about Fed bank research too. While, undoubtedly, some good research is being subsidized, I don’t like the idea of such massive influence of a government organization on economic research.
It also concerns me that central banks cling to DSGE models for forecasting that the private sector wants nothing to do with. Are we supposed to believe that such ridiculous ivory tower forecasting approaches are superior on average to the approaches used by for-profit firms? It’s silly.
11. July 2017 at 04:17
Antischiff:
Interestingly enough, Milton Friedman many decades ago was already worried that monetary economics was coming to be dominated by central bank staffs.
Since then the Fed has muscled up, the BIS has muscled up, and all the regional Fed banks have muscled up and seem to think they need to pontificate on not just regional economies but national and global economics as well.
Beyond that, it turns out that many regional Fed banks have contracts out with academic or private-sector economists, and have staff at peer-reviewed academic trade journals.
I think only the invention of the Internet has allowed some air into the monetary room in general, but whether blogs such as the excellent Money Illusion have any influence at the Fed is yet to be seen. There certainly seems to be zero motion towards NGDPLT, or even an IT band, as opposed to an IT.
In general, the Fed is becoming incredibly hidebound and self-reverent.
The Fed has never even held a seminar on NGDPLT. The topic has never been raised at the Jackson Hole, Wyoming shindig, to my knowledge.
Now the Fed is citing anecdotes about tight labor markets to justify rate hikes. Data dependent, except when they are not.
11. July 2017 at 05:25
Benjamin Cole,
Yes, the FOMC did discuss NGDP targeting under Bernanke, but rejected the idea for silly reasons. The Fed has to take some of the blame for the fact we currently have a dumb as rocks traitor in the White House. The recovery was obviously ridiculously slow and still isn’t complete, as unemployment continues to drift downward 8 years after the crisis, after considerable permanent damage likely done by having millions unemployed for years. If anything, market monetarists have been too soft on the Fed.
I am a calm person, but I’m really angry about this fiasco that has contributed toward corroding our political health.
11. July 2017 at 06:42
I love your US News article, Scott, both the substance and the style. If only everyone could focus on our errors and how to improve, without the blame and vitriol, the way you do.
11. July 2017 at 07:36
Kenneth Duda,
Yes, Dr. Sumner’s approach is very good, but many of the rest of us should not be so kind. The Fed has been a huge failure overall as an institution and should be abolished.
11. July 2017 at 09:16
The Fed should be abolished in favor of a free market of money. Moving it to the Treasury strikes me as exchanging one set of problems for another.
13. July 2017 at 12:15
Steve F understands economics.
This actually is not just about morality or ethics or doing hat is right. It is an economic fact, absolutely true that cannot be denied, that state run fiat institutions, because they are not subject to private property rights of the population, and thus not subject to market forces of profit and loss that could make or break the institution itself, those who make the currency printing decisions cannot know whether they are issuing too much or too little for the market. Only if one’s decisions are subject to market forces, can one know that one is doing the right thing or the wrong thing.
And no, arbitrarily deciding that because 10 billion potatoes were produced and sold last month, and 9.9 billion before that, that this month should have 10.1 billion produced and sold by the anti-market forces of government, because “reasons”, be it naive and counterproductive notions like “stability”, stupid fear mongering like Hitler 2.0, and statist apologies like “pragmatism”. You cannot stabilize socialism and capitalism together. You cannot make permanent infinite money printing to force NGDP to rise when collective market forces would decrease it, and yes, market forces very much are (occasionally) about tactical “deflation” as it is the only way that needed relative spending changes can fix the relative real capital problems caused by inflation.
Just because you only look at one variable, NGDP, it does not mean that this is the only variable that changes on account of inflation. Oh no, even if the “target” becomes NGDP (or the demand for anything, this is true for all targets) the way the inflation system works is that it (adversely) affects relative spending, relative prices, relative interest rates, and thus relative capital and labor allocation, and THAT is a problem that inflation cannot solve, because it is inflation that caused it. More inflation will only stretch those relative stresses further still.
With the Fed reducing inflation (which is the cause for the rise in interest rates, as has historically been the case, I mean, the Fed cannot know how to raise rates or lower rates if it followed MM advice. The FOMC knows it can raise rates by reducing the speed at which it monetizes securites held by the mafia “made” member banks. This is how the effective fed funds rate is always almost exactly the target fed funds rate. The Fed increases bank reserves when it wants to lower the rate, and decreases reserves when it wants to raise the rate.
Banks that borrow at higher or lower rates from each other, of course tend to increase and decrease the rates at which it lends to firms and individuals. Rates as such are in turn constrained by the going rates of profit.
The Fed is raising rates, and because of the past undue credit expansion and inflation, which has kept rates at low levels for almost 10 years, this reduction in inflation is going to expose a degree of worldwide capital malinvestment never before seen in history. The current Presidential administration will likely be blamed for what is going to happen, and something tells me Sumner is going to be relatively silent about this and will spend nowhere near the same effort in explaining ad infinitum that Presidents have very little if any effect on monetary conditions, as with the Obama admin.
The shit is going to hit the fan hard if present central bank trend continues, eventually culminating in a breakdown of the monetary system altogether. Go long Bitcoin and Ether.
14. July 2017 at 05:33
Thanks Ken.