The Fed was created by an act of Congress and could theoretically be terminated by Congress. So, the Fed has to be respectful of Congress.
Prior to the creation of the Fed, our economic policy consisted fiscal policy alone, i.e., controlling the economy with the Federal budget and regulation. The purpose of the Fed was to manage monetary policy, i.e., controlling the economy with the money supply and regulation of banking. They wisely felt that a two-fisted or binary approach to economic policy would be more effective, and they were right!
The Chairman of the Fed is required to testify before each house of Congress twice a year, producing four very dull performances. The Fed Head is always respectful, maybe more respectful than he should be. For the last forty years, we have had an active monetary policy but a passive fiscal policy. Congress has been unable to balance their budget over a year, as Austrian economists want, or over a business cycle, as Keynesian economists want.
One time, Fed Head Paul Volcker warned Congress he would "break the back" of inflation by himself, since Congress could not control its spending and taxing. He promptly raised interest rates to traumatic levels, plunging America into a full-blown recession. Congress howled but did nothing to improve their handling of fiscal policy. Fortunately, the recession did as expected, reducing inflation. Brinksmanship paid off!
His successor was Alan Greenspan, who used obtuse vocabulary to confuse and intimidate Congress but never threatened them. Ever the Libertarian, he would sometimes make snide remarks, such as that companies would never do anything that threatened their own existence. (Ask Lehman Brothers!) He enjoyed a cozy relationship with Congress.
Next was Ben Bernanke, who famously said he didn't believe in brinksmanship with Congress. He used monetary policy to steer the economy alone, without benefit of fiscal policy. (I have the greatest respect for him and the single-handed role he played during the Global Financial Crisis.) While he was always clear that he would appreciate some help from Congress, he never called them irresponsible.
Currently, the new Fed Head is Janet Yellen, and it is not yet clear how much truth she will speak to Congress. One early observation is that she has a tendency to talk-over any idiot member of Congress, which is a step in the right direction. You, Go, Girl!
The economy is now healing but Congress deserves no thanks. Nobody is proud of the blunt force weapon that sequestration is! How do we get fiscal policy working again? Should we put the economy into recession again? Did Paul Volcker do the right thing? It was bad in the short term but helped America in the long term.
As long as Congress has the power to terminate the Fed, it will be difficult for the Fed to even whisper truth to power. At the very least, the Fed should not volunteer to give up on brinksmanship.
Rand Paul is wrong! The Fed must be strengthened and made safe from Congress.
Prior to the creation of the Fed, our economic policy consisted fiscal policy alone, i.e., controlling the economy with the Federal budget and regulation. The purpose of the Fed was to manage monetary policy, i.e., controlling the economy with the money supply and regulation of banking. They wisely felt that a two-fisted or binary approach to economic policy would be more effective, and they were right!
The Chairman of the Fed is required to testify before each house of Congress twice a year, producing four very dull performances. The Fed Head is always respectful, maybe more respectful than he should be. For the last forty years, we have had an active monetary policy but a passive fiscal policy. Congress has been unable to balance their budget over a year, as Austrian economists want, or over a business cycle, as Keynesian economists want.
One time, Fed Head Paul Volcker warned Congress he would "break the back" of inflation by himself, since Congress could not control its spending and taxing. He promptly raised interest rates to traumatic levels, plunging America into a full-blown recession. Congress howled but did nothing to improve their handling of fiscal policy. Fortunately, the recession did as expected, reducing inflation. Brinksmanship paid off!
His successor was Alan Greenspan, who used obtuse vocabulary to confuse and intimidate Congress but never threatened them. Ever the Libertarian, he would sometimes make snide remarks, such as that companies would never do anything that threatened their own existence. (Ask Lehman Brothers!) He enjoyed a cozy relationship with Congress.
Next was Ben Bernanke, who famously said he didn't believe in brinksmanship with Congress. He used monetary policy to steer the economy alone, without benefit of fiscal policy. (I have the greatest respect for him and the single-handed role he played during the Global Financial Crisis.) While he was always clear that he would appreciate some help from Congress, he never called them irresponsible.
Currently, the new Fed Head is Janet Yellen, and it is not yet clear how much truth she will speak to Congress. One early observation is that she has a tendency to talk-over any idiot member of Congress, which is a step in the right direction. You, Go, Girl!
The economy is now healing but Congress deserves no thanks. Nobody is proud of the blunt force weapon that sequestration is! How do we get fiscal policy working again? Should we put the economy into recession again? Did Paul Volcker do the right thing? It was bad in the short term but helped America in the long term.
As long as Congress has the power to terminate the Fed, it will be difficult for the Fed to even whisper truth to power. At the very least, the Fed should not volunteer to give up on brinksmanship.
Rand Paul is wrong! The Fed must be strengthened and made safe from Congress.
