Can the Federal Reserve stay independent?

Posted by: Peter Coy on July 06

Guest blog from Economics Editor Peter Coy

Fed watchers note: Fed Vice-Chairman Donald Kohn is testifying this Thursday on the topic of Federal Reserve independence. It’s before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. Should be interesting, coming on the heels of Fed Chairman Ben Bernanke’s efforts to fend off congressional attacks, including a bill from Texas Republican Ron Paul seeking to audit the central bank.

Before he joined the Fed, when he was still a Princeton academic, Bernanke seemed to take the position that the Fed merited plenty of independence simply because it was uninvolved in politics. There’s nothing political about managing the economy to hit an inflation-rate target that everyone agrees on, right?

But it’s clear now that Bernanke has a bigger vision for the Fed, one that involves supervisory powers over the entire financial sector. You can argue that the Fed had broad power already, but in politics you never know how much power you have until you try to exercise it. That’s what the Fed is seeking to do now—test its limits.

The deeper the Fed wades into running the financial system as well as the economy, the harder it will be to maintain its cherished independence. That’s just a fact of life in a democracy.

Here’s a link to a blog citing comments by St. Louis Fed President James Bullard defending Fed independence.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Rycoka

July 6, 2009 06:35 PM

The Federal Reserve is an obvious case of an unelected body assuming unprecedented powers to serve the interests of its own constituency (the financocracy).

I would argue that "managing the economy to hit an inflation-rate target that everyone agrees on" is political, especially if the real result of this activity is increasing debt saturation.

Saturation indebtedness is in the interests of the finacocracy, but not, I would argue, in the interests of the people of the US or the world.

Thanks to the efforts of the financocracy the US (and my country Australia) is now "supersaturated" in debt.

I would argue that preserving the "independence" of the Fed, is in fact preserving the power of the financocracy. This will serve to delay the inevitable and needed debt destruction, stifle necessary change and prolong the human misery of recession/depression.

bria

July 6, 2009 07:15 PM

The Fed is not our friend. It is a private corporation founded by and for the benefit of the nations financial elite. It is doing exactly what it was built for. Namely creating bubbles of various sorts, allowing the inevitable crashes and then the Fed stockholders get to gather up the pieces at pennies on the dollar.

A side benefit is that the socialists get to have our population in eternal servitude to the insidious tax called inflation. Without the Fed, there would be no inflation.

Only a return to the gold standard will solve a debt biased societies ills. Gold is honest money where as paper money has long been manipulated by the greedy politicians and financial technocrats.

Call me crazy but every single society that has ever used debt to finance growth has paid the ultimate price, oblivion....

On the other hand, every society that has based it's money system on gold or other hard currency, has experienced long periods of stable growth. Only when the politicians can no longer fulfill promises to the citizens without inflating the currency do these societies get in trouble.

Read "The Creature From Jekyll Island" for a full discourse on the subject. Warning, its not for the faint at heart!

Ajay

July 6, 2009 08:30 PM

Do the gold standardistas realize that 90% of currency is private checking currency, through fractional-reserve banking? And that booms and busts long pre-dated the greenback, probably cuz of fractional-reserve banking? Instead of railing against the Fed or the fiat dollar, or for a silly gold standard, go do something about. Private digital currencies are feasible today, make it happen. If you believe in gold so much, E-gold has done reasonably well, work on making it more so. I don't think you'll get anywhere, as storing a bunch of gold in a warehouse just as a store of value is a silly, outdated idea, but that option is always available to you. A better idea is other commodity-backed digital currencies, I think these private currencies will inevitably kill off national currencies and I hope to help make that happen in the coming years. :)

Chuck Gaffney

July 6, 2009 08:44 PM

People know I'm far from a conservative right-winger but I am all for Ron Paul's bill to audit the FED. It's about time the banks, like ANY other business, becomes responsible for their actions.

Rev. Drake

July 6, 2009 09:44 PM

It all began in 1913 when the Roschilds bribed the few Senators & Congressmen that when there during Christmas break. Wham Fed was born and IRS tryed to Tax sweat equity labor. Both are illegal accouding the the Real Constition Google Arron Russo for the whole story

Rev. Drake

July 6, 2009 09:44 PM

It all began in 1913 when the Roschilds bribed the few Senators & Congressmen that when there during Christmas break. Wham Fed was born and IRS tryed to Tax sweat equity labor. Both are illegal according the the Real Constition Google Arron Russo for the whole story

JohnMD

July 6, 2009 10:37 PM

The Fed is not and never was "independent" of politics. The banks that own it control politics. This is particularly true of Goldman Sachs. Rates and policies are adjusted to whatever favors the profits of the biggest banks.

Admittedly, politicians are dastardly creatures who always try to spend money to help their constituents. But, banks like Goldman Sachs are worse. They are dastardly creatures who always try to spend public money in order to steal it for themselves. They ARE the Fed!

JohnMD

July 6, 2009 10:44 PM

What's all this about the Rothchilds, Rev. Drake? The Fed has nothing to do with them.

The Federal Reserve was and is the creation of J.P. Morgan, who was a white Anglo-Saxon protestant bankster. It is still controlled primarily by J.P. Morgan Chase and Goldman Sachs.

LAO

July 6, 2009 11:17 PM

I think the real question is whether the Fed is actually independent, or are they clandestinely setting economic policy? Note that the last Republican Presidential candidate thought he should learn about economics by reading Greenspan's book. There is a lot of circumstantial evidence that suggests the Fed is in bed with just about everyone except 95% of the American people. Auditing them on a regular basis would be of value if it can reveal whether they are influencing more than monetary policy, and whether they are even upholding that role. Otherwise, we have a lot of work to do to preserve this democracy.

Strategery

July 6, 2009 11:20 PM

If the FED had nothing to hide, then they would have no problem with an audit.

The FED has not done their job (according to their charter), which is to balance economic growth with price stability. For the last few years, we had unsustainable economic growth and rising prices. Now, we have negative growth. On those grounds alone, the FED should be stripped of their charter.

In addition, the PRIVATE Federal Reserve Bank works against the interests of most people, businesses and governments. Like any company, they do what's best for their shareholders--which are the banks that caused this economic mess. Now, Obama wants to give them even more power!

Democrats and Republicans are just puppet politicians, both are owned by the FED. The FED has a monopoly on the ability to create money, then they lend it with interest! More money is owed than exists to repay! One of the REAL reasons for the revolutionary war was to cut ties with the Bank of England, which was a central bank that had taken control over Brittan’s government. The founding fathers wrote, in the constitution, that CONGRESS was to issue money. Central banking is slavery with less transparency!

GO RON PAUL!

sam

July 7, 2009 12:46 AM

The idea of giving the Fed more regulatory power is insane. The Fed is the problem.

Samuel

July 7, 2009 01:43 AM

Can the Fed stay independent? Are you kidding?

The Fed failed to regulate, kept interest rates low to create the housing bubble, they HIRED LOBBYISTS, and they have exceeded their authority by buying fannie/feddie debt (which is not in their charter).

The Fed should be dismantled. At the least, we need a full audit. Then we need to allow competition in currencies so people don't get arrested under the "legal tender" laws.

Audit the Fed, then End the Fed.

Snoz

July 7, 2009 04:42 AM

"Can the Fed stay Independent?" is as a loaded question as "Can Peter Coy stop beating his wife?" The proper answer is neither Coy ever beat his wife nor Federal Reserve is ever independent. Congress created the Federal Reserve, which is comprised of several large private bankers and several congressional approved chairpersons. As the central bank works for UncleSam, the Fed's bankers receive the first benefit of UncleSam's fiscal policy as the Fed is at the "top of the food chain." Whether to fund a war or social program, the Fed's printing press stands ready and able to pay for them. The result has been the debasing of the US currency. Today's dollar is worth less than 10% of its value 30 years ago thanks to Fed's printing press. During that same time, American working-stiff worked for almost nothing because not only prices exceeded their wages but their meager saving is worthless due to inflation. America is fast becoming a welfare state because on the one hand the Fed's printing press has robbed people's savings, reducing people to paupers while on the other hand UncleSam hands out meager subsistent welfare programs. Today, more Americans are working harder and longer but have less to show for. It is no wonder that many Americans borrow excessively to maintain their accustomed standard of living. There will never be an audit of the Federal Reserve. Such audit may expose the complicity between UncleSam and the Fed, allowing people to see the fraud perpetrated upon American workers.

Snoz

July 7, 2009 04:44 AM

"Can the Fed stay Independent?" is as a loaded question as "Can Peter Coy stop beating his wife?" The proper answer is neither Coy ever beat his wife nor Federal Reserve is ever independent. Congress created the Federal Reserve, which is comprised of several large private bankers and several congressional approved chairpersons. As the central bank works for UncleSam, the Fed's bankers receive the first benefit of UncleSam's fiscal policy as the Fed is at the "top of the food chain." Whether to fund a war or social program, the Fed's printing press stands ready and able to pay for them. The result has been the debasing of the US currency. Today's dollar is worth less than 10% of its value 30 years ago thanks to Fed's printing press. During that same time, American working-stiff worked for almost nothing because not only prices exceeded their wages but their meager saving is worthless due to inflation. America is fast becoming a welfare state because on the one hand the Fed's printing press has robbed people's savings, reducing people to paupers while on the other hand UncleSam hands out meager subsistent welfare programs. Today, more Americans are working harder and longer but have less to show for. It is no wonder that many Americans borrow excessively to maintain their accustomed standard of living. There will never be an audit of the Federal Reserve. Such audit may expose the complicity between UncleSam and the Fed, allowing people to see the fraud perpetrated upon American workers.

Karl

July 7, 2009 12:42 PM

'Google' this- DR MANDELSTAMM OF KIEFF, and read the passage entitled- 'The Talmud And The Ghettoes'. Perhaps there's a link between what's happening in the world today & what the FED'S primary goal, or "historical hope" is, huh? Dr. Mandelstamm's quote can be found on 'Page 94' of that passage. Read it first, then read the passage in its entirety. Have a nice day!

Karl

July 7, 2009 12:43 PM

JohnMD, You said that the FED is primarily controlled by JP Morgan Chase & Goldman Sachs, correct? If that's true, then the FED was responsible, or at least partly responsible for the SPIKE in the price of OIL last year, right? 'Google' this- DID SPECULATION FUEL OIL PRICE SWINGS, and watch that '60 Minutes' segment on the web. I'm sure you recall oil's price of $147 a barrel last year, correct? And didn't the SPIKE in the price of oil cause STARVATION in other parts of the world due to the price of commodities such as grain, rice, etc., to go up? So, the FED had/has the ability to reduce the population of some, or even ALL countries by increasing the price of OIL which will create STARVATION, don't they? "Only a pawn in their GAME." - Dylan

LAO

July 7, 2009 02:21 PM

I think most people are royally confused about the Fed versus government, and likewise how investment banks differ from other banks, particularly since they became publicly traded. Indeed, I find the current system to be convoluted and an obvious invitation to insidious effects. The whole of the financial system obviously has everybody trying to sort it out, and many of us running off and declaring we've discovered the fundamental flaws that must be corrected, except that we can't all be right.

If BW could write the definitive, cool-headed, article on how the financial system elements actually work together, the intricacies of change over time, and what are the juncture points with the real world -- devoid of opinion -- I would expect it to be the most widely referenced business article for years to come.

American

July 7, 2009 03:58 PM

END THE FED. We can either do it peacefully and democratically or through revolution once the crony capitalists have destroyed the last remnant of wealth left to the people. The funny thing is, the owners of the Fed exhibit a greed that is only rivaled by their stupidity. Once they destroy the goose that lays the golden egg (the economy) there will be nothing left to nurse on parasitically.

Levelheaded

July 7, 2009 04:27 PM

@LAO
The reason BW cannot write this article is because no one actually knows how the entire financial system works...and that is the problem.

siesta000000

July 7, 2009 11:13 PM

I enjoyed this article, very insightful analysis. I keep up with an analysis of the Fed's balance sheet release every Thursday. Check it out at http://www.economiccrisiswatch.blogspot.com/

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!