House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers, with instructions to ignore the jobless

Every time Romney opens his mouth he seems to drive even more of those less well-educated, populist, culturally conservative Republicans into Santorum camp.  How can the GOP win those voters back in the fall?  The House Republicans have concocted a brilliant idea:

The bill, which will be formally introduced later this week by Congressman Brady, would eliminate the employment leg of the dual mandate, requiring the Federal Reserve to focus only on price stability.

The legislation would also restructure the Federal Open Market Committee (FOMC). The bill would give permanent seats on the committee to the twelve regional Federal Reserve bank presidents, who are chosen by regional Federal Reserve Bank directors. Those boards are composed of private citizens.

Voila; you’ve pissed off unemployed Youngstown steelworkers and Ron Paul audit the Fed nuts in one grand gesture.  But at least it would lock up the conservative, hard money, small town banker vote for the GOP.

PS.  I found this amusing:

Sensing a political opportunity, all twenty-seven Democrats on the panel have signed a letter asking the chairman, Representative Spencer Bachus, to hold a full hearing on the matter of keeping the Federal Reserve from addressing unemployment. They stress they do not support the bill, but coyly say that “the country would benefit from having a full discussion of this issue, now that it has been raised by various influential figures, including you.”

Say what you will about the Dems, they aren’t suicidal.

PPS.  I don’t have a link for the first quotation—it seems to be a memo from the House Committee on Financial Services.

HT:  Christopher Mahoney



32 Responses to “House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers, with instructions to ignore the jobless”

  1. Gravatar of Negation of Ideology Negation of Ideology
    7. March 2012 at 18:42

    I agree, this is a total outrage. Barney Frank had a good proposal to do the opposite – remove the Regional Bank Presidents from the FOMC. I’d prefer to go even further and take the Regional Banks away from the private banks. Defense contractors don’t get to appoint seats to the Pentagon, and banks shouldn’t appoint seats to the Fed Regional Banks. If you did that, then I’d have no problem with Regional Presidents getting a vote on the FOMC.

    And of course if they want to change the mandate, they should change it to a NGDP target.

    There is some good in the bill, restricting the Fed to only purchasing Treasuries for example. The Fed shouldn’t be buying private securities. But overall, it’s a pander to the inflation chicken littles when inflation is at Eisenhower era levels.

  2. Gravatar of John Thacker John Thacker
    7. March 2012 at 18:44

    Bad idea. Though in some ways what we have now is that the Fed actually simply ignores the unemployment part of the dual mandate. Making it explicit would be more honest, I suppose.

    Now if there were a bill proposing a good rule-based system.

  3. Gravatar of John Thacker John Thacker
    7. March 2012 at 18:45

    Always impressive when you can come up with a hard money bill that’s too crazy for Ron Paul.

  4. Gravatar of Steve Steve
    7. March 2012 at 19:12

    “The bill would give permanent seats on the committee to the twelve regional Federal Reserve bank presidents, who are chosen by regional Federal Reserve Bank directors.”

    What would Thomas Jefferson say?

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

  5. Gravatar of Andrew C. Andrew C.
    7. March 2012 at 19:13

    I think the GOP and the libertarian party both desperately need market monetarist candidates. Or at least advisers.

  6. Gravatar of dwb dwb
    7. March 2012 at 20:10

  7. Gravatar of Bonnie Bonnie
    7. March 2012 at 20:26

    “Every time Romney opens his mouth he seems to drive even more of those less well-educated, populist, culturally conservative Republicans into Santorum camp. How can the GOP win those voters back in the fall?”

    I guess I missed what Romney said, there isn’t any context here. Doesn’t surprise me because every time he gets cornered by the press and isn’t prepared, landmines fly out of his mouth.

    So what they are saying with this bill is that the only goal the Fed should have is price stability. So when prices start rising after a recession, which typically happens, that means the Fed should tighten? It doesn’t make much sense to me. And what about supply-side inflation? Are they going to get rid of big government to keep that to minimum? The last thing we need is to get choked from supply side inefficiencies, and then have the Fed tighten because it’s causing prices to rise – Oil is a great example.

    The two-party system really sucks when both parties are stuck on different spins of stupid. I hope one of them figures out what needs to be done before we end up like Greece.

  8. Gravatar of DonG DonG
    7. March 2012 at 20:48

    The ECB has a single mandate. How’s that working out?

    I hope the Dems are able to turn up the heat on the tight money pinheads in the FOMC.

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. March 2012 at 21:02

    The title of your post says it all: the rest is just further and better particulars.

    Barney Frank’s suggestion is much better than the House Republicans’. The RBA manages just fine without a single banker on its Board. The Payment Systems Board has some financiers on it, but that makes rather more sense, since its concerns rather more technical.

  10. Gravatar of Jon Jon
    7. March 2012 at 21:13

    Considering much the world has a price-inflation target that portion of the proposal isn’t ridiculous.

    If you read the actual legislative language, the employment mandate is actually linked to some crusty, discredit theory, and it is an embarrassment to the US that it persists. It is a good thing someone is finally moving to scrub the language to couch it in purely nominal terms.

    You should see this as the first step to adopting an NGDP target. Heck if the opposition was remotely rational, they’d counter-offer using NGDP instead of inflation.

  11. Gravatar of Cassander Cassander
    7. March 2012 at 21:30

    I hate it when people do the right thing for the wrong reasons. Now I have to defend Brady even though he’s almost certainly an idiot. The dual mandate is stupid and should be eliminated, full stop. One can no more serve 2 mandates than one can serve 2 masters, and its existence allows the bank to avoid accountability. Changing to a single mandate is one step closer to a single NGDP mandate. The existing structure of the Fed is also absurd, though I admit to not knowing anywhere near enough about it to know how to fix it.

  12. Gravatar of Morgan Warstler Morgan Warstler
    7. March 2012 at 22:06

    This post presents another opportunity to discuss our bet.

    You win, I adopt NGDP as my preferred form of political conservatism, admitting that spending all the money to end the Dem voter payoff since Reagan was the wrong path.

    I win, you admit level NGDP is nice, but only if done in service of the grander point: crushing public employees and freeing America from the worst parts of Democracy, so you FOCUS on serving the Tea Party red meat, a la Friedman.

    AND you dedicate you book to me.

    It is a fair and noble bet.

    Life changing for one of us, make sure you ACCEPT publicly the terms of the bet.

  13. Gravatar of Major_Freedom Major_Freedom
    7. March 2012 at 22:16

    This blog post is hypocritical.

    House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers

    You say that as if you’re not a supporter of a cabal of unelected bankers maintaining control over monetary policy in order to target NGDP.

    They’re just looking at you economists and thinking “If they’re OK with a cabal of unelected bankers controlling money production and aggregate spending, why not have them control fiscal spending as well?”

    There’s no logical consistency in you being against fiscal policy being controlled by the unelected cabal of bankers but apologizing for the unelected cabal of bankers having monetary policy control.

    If you say people ought to be compelled to have the money controlled by a cabal of unelected bankers, then why not say people ought to be compelled to have the Treasury controlled by them too?

    Status quo is not an argument.

  14. Gravatar of Daniel Daniel
    7. March 2012 at 23:56

    What’s ironic is that the GOP thinks that without the jobs mandate, Bernanke and Co. wouldn’t have gone all discretionary during the crisis. The fact is they barely kept inflation above zero in the thick of things, and should have done much much more if jobs held even half the weight of inflation in their objective function.

  15. Gravatar of ChargerCarl ChargerCarl
    8. March 2012 at 00:44

    I’d say that this is unbelievable, but i’d be lying.

  16. Gravatar of Robert Robert
    8. March 2012 at 00:54

    I may agree with your assessment of the politics, but I worry it might hurt the message to refer to Ron Paul supporters as nuts or question a specific politicians intentions. Paul Krugman might help sell the left on the things like ngdp targeting, but you really don’t have anyone mainstream on the right.
    Ponnuru’s National Review article (Money Bawl) did a good job at framing monetary issues for the right, without offending, but it’s not going very far on that side.
    Just saying, leave the politics to the politicians, or else it will dilute a perfectly good message…

  17. Gravatar of Hylton Hylton
    8. March 2012 at 01:38

    Hi Sumner

    I would like your comment on this link to the financial times on QE’s “artificial distortions”. I think there is a lot of misconception, and nobody seems to be able to understand the disaggregation of QE – where I mean that they lump any MP decisions other than “usual” policy decisions into QE…?

    Also, can you recommend a paper on ngdp targeting in general equilibrium models.

  18. Gravatar of Bill Woolsey Bill Woolsey
    8. March 2012 at 04:41


    I agree that having the Fed pick and choose what assets it buys to try to direct credit is a bad idea.

    But I also think having the Fed be unable to purchase any other assets is a bad idea too. What happens when the Fed has purchased the entire national debt?

    Further, it is more important that the Fed be able to expand base money as much as needed. That ability will create expectations that will might make it unnecessary.

    That is, if the Fed bought the entire national debt, and still the result will deflation, and it was banned from doing anything more, that expecation would raise the demand for base money. If it was bad enough, it could lead to that situation. The Fed owns the entire national debt, and we have deflation anyway.

    But if the Fed is not subject to that limit, and ideally, can buy whatever it must to keep nominal GDP growing on target, then they might never have to buy more than a tiny fraction of the national debt.

  19. Gravatar of dtoh dtoh
    8. March 2012 at 04:50

    Or better yet, give the Fed the ability to force banks to buy assets by allowing the Fed to flexibly set MINIMUM and maximum banking asset/equity ratios by asset class.

    Then the Fed really wouldn’t have to do anything. They could just sneeze to move asset pricing, increase credit, increase M etc, and as a bonus we wouldn’t have to listen to all the crap about the Fed printing money and the big bad hyperinflation wolf.

  20. Gravatar of Bill Woolsey Bill Woolsey
    8. March 2012 at 05:01

    The regional Fed presidents are elected by their boards. The majority of each board is elected by the bankers in their region, with the small banks voting for 2, the middle sized banks voting for 2, and the large banks voting for 2. One of these can be a banker and the other must not work in the banking industry.

    There are 3 other members of each board appointed by the Board of Governors.

    The Board of Governors is pointed by the President with the approval of the senate for 14 year terms.

    Each Federal Reserve President must be approved by the Board of Governors too.

    Personally, I think that the bankers should be taken out of it.

    I think the Fed should be replaced with a monetary authority. I think appointing a board for long terms is a good idea, but not necessarily 14 years. Like 6 or something.

    The notion that the monetary authority is about banking is a mistake.

    On the other hand, I think that the only monetary liabilities that the monetary authority should issue are deposits that only banks can hold, which is in tension with my other postion.

    As I said before, I think the plan where the monetary authoirty issues just hand to hand currency is a bad idea. It shouldn’t issue any, except maybe for some kind of emergency. (Unfortunately, it would be likely to issue it during the wrong kind of emergency.)

    Still, the principle on which the quantity of those deposits are adjusted should be a stable growth path for spending on output. It should not be about regulating how much bank lend, what interest rates they charge, how much they have to pay to borrow, or whatever else central banks typically think they are supposed to do.

    If the government wants to bail out depositors or bankers or make them loans or promote banking efficiency, then it should be done by someone other than the monetary authority and funded by something other than new money–preferable current tax revenue, or at the least, explicit government debt.

  21. Gravatar of Tommy Dorsett Tommy Dorsett
    8. March 2012 at 05:45

    How about the utter idiocy of the Fed’s apparent preference for new stimulus to be offset with term deposots? Sterilized QE. Gee, it’s worked so well for the Europeans and Japanese why not try it here? Not. This latest ad hocery is an embarrassment to the Fed and an insult to sound policy making.

  22. Gravatar of John Thacker John Thacker
    8. March 2012 at 06:55

    “What would Thomas Jefferson say?”

    Duh. Thomas Jefferson would say “End the Fed!” as would that other Democratic Party icon, Andrew Jackson. Both were famous for opposing the entire existence of the First and Second Banks of the United States, respectively.

    Yet that position is taken as crazy.

    However, I do note that so many people who think that the Fed is being horrible by ignoring its statutory dual mandate saw no problem with Peter Diamond being appointed to the Federal Reserve Board, despite blatantly violating the law about having geographic balance on the board.

    If no one complains when part of the Fed’s enabling law is ignored, then they’re going to feel free to ignore another part.

  23. Gravatar of ssumner ssumner
    8. March 2012 at 07:09

    I agree with all the comments up to Jon. Thanks for the link dwb.

    Jon and Cassander, I disagree. I think those two goals are reasonable. I think where people get confused is thinking the Fed should directly target unemployment. Obviously that would be madness. Congress is saying to the Fed that we care about these two problems–do your best. The Fed should say they feel the best way to deal with these two problems is via a NGDP target. We could also target inflation, but that would lead to greater fluctuations in employment (and lower average employment I’d add, as the business cycle isn’t symmetrical.)

    Morgan, I don’t recall making any bets.

    Major Freeman, You said;

    “You say that as if you’re not a supporter of a cabal of unelected bankers maintaining control over monetary policy in order to target NGDP.”

    Maybe that’s because I am opposed to that system.

    Daniel, Very good point.

    Robert. I meant that jokingly. I have no problem with auditing the Fed. I meant they are perceived as nuts by the mainstream. But I accept your criticism.

    Hylton. The link didn’t work for me, but it appears to be based on the mistaken view that low rates reflect easy money. That’s false, as anyone could tell by checking out the US in the 1930s or Japan since the mid-1990s.

    Bill, I think all that sounds reasonable, although for now I do analysis assuming the Fed controls the currency stock.

    Tommy, Yes, many have sent me that story, and I will do a post.

  24. Gravatar of Neal Neal
    8. March 2012 at 07:49

    Scott, would you say the Fed in the ’60s and ’70s targeted unemployment, which led to excess and unstable infl- err, NGDP growth?

  25. Gravatar of TylerG TylerG
    8. March 2012 at 10:16


    It’s all about letting the market set the money supply via the trading of NGDP futures contracts. Or would that still be a case of a cabal of unelected bankers maintaining control over monetary policy to you?

  26. Gravatar of Major_Freedom Major_Freedom
    8. March 2012 at 10:56


    “You say that as if you’re not a supporter of a cabal of unelected bankers maintaining control over monetary policy in order to target NGDP.”

    Maybe that’s because I am opposed to that system.

    Hahahaha, no you’re not. This whole blog is devoted to it. The Federal Reserve is controlled by a “cabal of unelected bankers”!

    Your image of the Fed is terribly naive. Next thing you’ll say is that the House of Morgan bankers and their power brokers in Washington created the Federal Reserve for altruistic and “stabilize the economy” benevolent reasons, rather than selfish and nefarious reasons.

  27. Gravatar of Negation of Ideology Negation of Ideology
    8. March 2012 at 13:23

    Bill Woolsey,

    You raise a good point about the monetary base possibly needing to be larger than the national debt. I agree with you that we need to have contingency plans to deal with that situation.

    My preference in that case is for the Fed (or whatever Monetary authority) to buy government backed loans first, because that is no more an interference in the economy than backing the loans in the first place. Next, buying state bonds or lending directly to states against future federal aid.

    If you get to the case where the monetary authority owns the entire federal debt, all federally guaranteed loans, and all state debt, then the new money would have to be distributed in some equitable way – maybe a dividend to the states by census, or a citizen dividend. I think that is unlikely to ever happen, but it is possible – particularly if we ever paid off the national debt.

  28. Gravatar of ssumner ssumner
    9. March 2012 at 06:11

    Neal, That was part of their problem, but not all. The Fed was also more politicized–helping Nixon get re-elected, for instance.

    Major, You really don’t know how to read, do you? I don’t support bankers controlling the Fed. Saying that they do control the Fed is a breathtaking example of illogical thinking. What possible bearing could that have on my policy preference that they be removed from monetary policy-making?

  29. Gravatar of Major_Freedom Major_Freedom
    9. March 2012 at 08:14


    I don’t support bankers controlling the Fed.

    Then you don’t support the Fed.

    Saying that they do control the Fed is a breathtaking example of illogical thinking.

    No, it isn’t “illogical”. The banks do control the Fed. They have a state granted monopoly. The Federal Reserve Act was written by bankers, to enable them to have independence from Congress so that they can print their own money to bail out their fractional reserve bank instability, and promising to buy government debt.

    You are breathtakingly naive about the world around you.

  30. Gravatar of Jon Jon
    9. March 2012 at 09:27

    Scott, sometimes you speak without getting the facts. I’m on my iPhone here so please reread your last post to me in this thread for context.

    The impetus of these committee hearings was the attached essay published this month.

  31. Gravatar of ssumner ssumner
    10. March 2012 at 09:15

    Jon, That article in no way changes my argument.

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