‘Audit’ the Fed and you blunt our best economic tool
When our economy was most fragile, politicians wrangled for years, writes Glenn Hutchins
by: Glenn Hutchins
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The Federal Reserve has done as much as any official body to spare America a repetition of the grim depression of the 1930s, but that is not always enough to make it popular. Suspicions have resurfaced that powerful financial interests are in league with the Fed to gain advantage for themselves, prompting calls from the left and right to “audit the Fed”.
Janet Yellen, the Fed chair, was this week moved to warn against measures that might subject policymakers to “short-term political pressure, in the name of transparency”. She is right. In the past six years, monetary policy has been the only consistently functional economic policy tool.
When our economy was most fragile in the aftermath of the crisis, elected politicians wrangled year after year. Eventually they adopted the budget “sequester” — a programme of automatic spending cuts that was supposed to be so unpalatable to all sides that it would force them to devise a compromise plan to avoid it. Instead, a package that was designed to be intolerable became the de facto fiscal policy. Washington cut back on basic research, failed to invest in the country’s ageing infrastructure, and did not address corporate tax or immigration reform. It also shut down the government and flirted with a default on US national debt.
The Fed, meanwhile, implemented a series of measures, among them a huge programme to buy assets with newly created cash, which — despite dire warnings — nurtured a steady (if slow) recovery.
Fortunately, the central bank was independent of politics, which enabled it to act.
That could change if the reformers have their way. Consider the “audit the Fed” proposal (which, despite its name, has next to nothing to do with accountability). It would compromise the Fed’s independence by adding a layer of oversight into monetary policy deliberations, even though the weight of academic and real-life evidence suggests that independent central banks make better policy.
This is not the only misguided change to receive support from a congressional figure. Another would put a straight-jacket on policymakers by prescribing specific rules for the formulation of monetary policy. Yet flexibility and agility are essential to effective policy.
Still another proposal would limit what Ben Bernanke, Ms Yellen’s predecessor, has called the Fed’s “most essential power” — its ability, in a crisis, to act as lender of last resort. A significant step was taken in this direction by the 2010 Dodd-Frank Act, which trimmed the Fed’s lending powers after the financial crisis. Mr Bernanke and others have warned against further limiting the Fed’s capacity to protect the economy in a financial panic.
The New York Fed, which played a particularly vital role in extinguishing the crisis, has become an object of suspicion because of its central role in the world’s financial system. (I serve as an unpaid director on its board.)
Fortunately, proposals to dismantle this body entirely have met little support. But legislation introduced in the Senate this year would single out the New York Fed president for nomination not by our board but rather by the US president, with Senate confirmation.
This, too, is misguided. The mechanisms by which the Fed is insulated from politics does not always sit well with elected officials — notably the role of the private sector in the regional Federal Reserve banks — but it is in the nation’s interest to protect Fed independence staunchly.
America’s central bank is a uniquely American institution, shaped by centuries of trial and error, learning and reform. It is not a monolithic government institution. Power is shared between the Board of Governors in Washington and regional Federal Reserve Banks, each controlled by an independent board of local leaders and bankers. Important elements of the central banking apparatus are distributed across the country. This structure embodies a series of compromises reflecting key principles descended from American history. It is what Judge Harold Greene once described as “an exquisitely balanced approach to an extremely difficult problem”.
There is no reason for history to stand still. Thoughtful debate and judicious reform have made the Fed the robust institution it is today. But we must draw a clear distinction between politics and purpose, between optics and substance. The Fed’s actions during the crisis clearly raised questions of appearance. Equally clearly, they saved the economy. The antidote for purely optical problems is transparency and accountability, not counter-productive “reform”.
The writer is a co-founder of Silver Lake, a private equity firm, and writes in a personal capacity
Janet Yellen, the Fed chair, was this week moved to warn against measures that might subject policymakers to “short-term political pressure, in the name of transparency”. She is right. In the past six years, monetary policy has been the only consistently functional economic policy tool.
When our economy was most fragile in the aftermath of the crisis, elected politicians wrangled year after year. Eventually they adopted the budget “sequester” — a programme of automatic spending cuts that was supposed to be so unpalatable to all sides that it would force them to devise a compromise plan to avoid it. Instead, a package that was designed to be intolerable became the de facto fiscal policy. Washington cut back on basic research, failed to invest in the country’s ageing infrastructure, and did not address corporate tax or immigration reform. It also shut down the government and flirted with a default on US national debt.
The Fed, meanwhile, implemented a series of measures, among them a huge programme to buy assets with newly created cash, which — despite dire warnings — nurtured a steady (if slow) recovery.
Fortunately, the central bank was independent of politics, which enabled it to act.
This is not the only misguided change to receive support from a congressional figure. Another would put a straight-jacket on policymakers by prescribing specific rules for the formulation of monetary policy. Yet flexibility and agility are essential to effective policy.
Still another proposal would limit what Ben Bernanke, Ms Yellen’s predecessor, has called the Fed’s “most essential power” — its ability, in a crisis, to act as lender of last resort. A significant step was taken in this direction by the 2010 Dodd-Frank Act, which trimmed the Fed’s lending powers after the financial crisis. Mr Bernanke and others have warned against further limiting the Fed’s capacity to protect the economy in a financial panic.
The New York Fed, which played a particularly vital role in extinguishing the crisis, has become an object of suspicion because of its central role in the world’s financial system. (I serve as an unpaid director on its board.)
Fortunately, proposals to dismantle this body entirely have met little support. But legislation introduced in the Senate this year would single out the New York Fed president for nomination not by our board but rather by the US president, with Senate confirmation.
This, too, is misguided. The mechanisms by which the Fed is insulated from politics does not always sit well with elected officials — notably the role of the private sector in the regional Federal Reserve banks — but it is in the nation’s interest to protect Fed independence staunchly.
America’s central bank is a uniquely American institution, shaped by centuries of trial and error, learning and reform. It is not a monolithic government institution. Power is shared between the Board of Governors in Washington and regional Federal Reserve Banks, each controlled by an independent board of local leaders and bankers. Important elements of the central banking apparatus are distributed across the country. This structure embodies a series of compromises reflecting key principles descended from American history. It is what Judge Harold Greene once described as “an exquisitely balanced approach to an extremely difficult problem”.
There is no reason for history to stand still. Thoughtful debate and judicious reform have made the Fed the robust institution it is today. But we must draw a clear distinction between politics and purpose, between optics and substance. The Fed’s actions during the crisis clearly raised questions of appearance. Equally clearly, they saved the economy. The antidote for purely optical problems is transparency and accountability, not counter-productive “reform”.
The writer is a co-founder of Silver Lake, a private equity firm, and writes in a personal capacity
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