The Congress learns what the Fed “is”

From today’s Bloomberg:

Audits Avoided

The Senate bill contains most of what Fed officials sought. In addition to preserving their bank-supervisory powers, it maintains a ban on congressional audits of interest-rate decisions that some lawmakers had sought to strip away. Ensign joined most Republicans in opposing the final legislation, saying in a floor speech that it failed to deal with Fannie Mae and Freddie Mac, the housing-finance companies seized by the government in 2008, and “does nothing to address real reform.”

The outcome puts Fed Chairman Ben S. Bernanke in a stronger position to withdraw record monetary stimulus as the economy recovers from the deepest recession since the 1930s, said Senator Claire McCaskill of Missouri, a state that is home to the Federal Reserve banks of Kansas City and St. Louis.

‘Not as Informed’

“They’ve done a good job of educating without lobbying,” said McCaskill, 56, a first-term Democrat who spoke with Kansas City Fed President Thomas Hoenig and St. Louis’s James Bullard during the debate. “A lot of members of Congress were not as informed as they should have been about what the Federal Reserve is and how it works.”

Well it’s good to know that they have now been “informed” by the Fed of just how important it is that Congress not go poking around as the Fed prepares to tighten monetary policy.

Let’s see if you commenters can come up with more clever retorts.



14 Responses to “The Congress learns what the Fed “is””

  1. Gravatar of Doc Merlin Doc Merlin
    9. June 2010 at 08:19

    It only makes sense that the Fed and its stockholders as the largest holders of US treasury debt, would want to deflate the currency at this point.
    If they owned very little debt, they would want to inflate the currency, because doing so makes them more money, if they hold a significant enough percent of the debt, then they would want to deflate it.

  2. Gravatar of Ted Ted
    9. June 2010 at 12:26

    Obviously McCaskill is familiar with the vast political science literature that conclusively demonstrates that the crappier the economy the more likely you are to get reelected.

  3. Gravatar of rob rob
    9. June 2010 at 12:49

    If it ain’t fixed, no need to break it.

  4. Gravatar of Rightwing Links (June 9, 2010) Rightwing Links (June 9, 2010)
    9. June 2010 at 16:53

    […] The Congress learns what the Fed “is” […]

  5. Gravatar of ssumner ssumner
    10. June 2010 at 05:03

    Doc Merlin, I have my doubts. Foreigners own more debt than the Treasury. Deflationary policies make the government’s debt burden bigger, not smaller.

    Ted and rob, Yes, we live in a topsy-turvy world.

  6. Gravatar of Indy Indy
    10. June 2010 at 05:23

    In related news, two of the congressmen who were supposed to be present at the main central banking seminar were absent, having mistakenly arrived at the Department of Agriculture lecture hall expecting a demonstration on “The portion of the population considered to be well-nourished”.

  7. Gravatar of Luis H Arroyo Luis H Arroyo
    10. June 2010 at 11:08

    Really is Bernanke preparing to tighten money? Terrible!

  8. Gravatar of Doc Merlin Doc Merlin
    10. June 2010 at 11:32

    An independent federal reserve that doesn’t have to answer for its monetary policy would have a self interested reason to deflate, but only if it owned a significant percent of its assets as us treasury debt.

    A not-independent federal reserve would want to inflate.

  9. Gravatar of scott sumner scott sumner
    10. June 2010 at 12:16

    Indy,, That’s funny.

    Doc Merlin, How about an idealistic Fed? Is that too much to expect? Bernanke is just another college professor like me. Maybe I’m naive, but I’d expect him to try to do the best job he could, which is what I’d try to do if I was in charge. He should want to go down as a great Fed chairman in the history books, not someone who made capital gains on Ded-owned T-debt. Again, I may be naive, but that’s the only way I can look at it.

  10. Gravatar of scott sumner scott sumner
    10. June 2010 at 12:20

    Luis, There was a bit of exaggeration in my post. I was reacting to the second paragraph, which suggested that this Congressional move made Fed tightening more likely. I don’t think it is imminent. However the hawkish statements from Fed officials also have a contractionary effect on asset markets.

  11. Gravatar of Doc Merlin Doc Merlin
    10. June 2010 at 16:00

    Idealists don’t tend to get promoted so high, and when they do, they tend to get co-opted.
    Look at Greenspan, he was once a huge supporter of the gold standard.
    Look at Bernanke, he was once someone who wanted to use loose monetary policy to stave off a depression.
    When they became chairmen they made an about face.

  12. Gravatar of Indy Indy
    10. June 2010 at 16:48

    Ridiculous Fed Conspiracy Theory Game Theory:

    1. Maybe the Fed *is* planning high inflation that will more than catch-up with the 2% leveling.

    2. But they also want to preserve the maximum capability of the government to borrow as much as possible at cheap rates in times of trouble

    3. So they have to create the false impression and expectations among bond-investors (especially foreign ones) of hawkishness and likely ultra-low-inflation, so the treasury can most cheaply finance the deficits and convert as much short-term debt into longer-maturity obligations.

    4. And then, wham, high inflation concentrated at the end of the decade making up for lost time and erasing the real value of the debt incurred during the crisis.

    5. And they can do all this without ever explicitly lying or breaking promises, since they never make any firm commitments.

    Probably zero similarity to reality, still, it would make the fed’s actions and statements seem perfectly rational and intelligent.

  13. Gravatar of Doc Merlin Doc Merlin
    11. June 2010 at 02:40

    Other possibilities:
    Possibility 1:
    The fed is still using the ancient IS-LM models to make decisions on fiscal policy, and has the multiplier set to be larger than one. If it, in reality is smaller than one, then they will be over-tight during large fiscal expansions.

    Possibility 2:
    They agree that for the US economy, monetary loosening was necessary, but they couldn’t care less about the US economy. They want the dollar to be preeminent while still keeping interest rates low and this is the perfect time to do that.

    Possibility 3:
    The fed did loosen lots and lots, but new computerized carry traders, and such make the stimulating monetary policy completely ineffective. This wouldn’t apply to excessively tight monetary policy.
    There is some evidence for this, as now the big carry trade is to borrow in dollars and deposit elsewhere.

    Possibility 4:
    Some sort of Austrian Business Cycle Crash (Hayek did predict that asset prices would plummet during an ABCT crash) happened, and because of the massive commodity and food inflation in late 2007 and early 2008, the Fed completely misread what was going on.

  14. Gravatar of scott sumner scott sumner
    11. June 2010 at 04:46

    Doc Merlin, You may be right.

    Indy, Nice theory, but I still don’t think it would help the Fed. Inflation would lower the burden of the debt, but the current tight money policy has forced the Federal government to borrow a lot more. So that defeats the purpose of the policy. Easy money is actually the best policy for big debtors.

    Doc#2, Items 2 and 4 are the most likely.

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