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The end of central bank independence, a continuing saga
"Why does one person have the right to grant $85 billion in a bailout without the scrutiny and transparency the American people deserve," asked House Speaker Nancy Pelosi (D., Calif) a reference to the loan the Fed gave AIG with the Treasury's blessing.
And:
"No one in a democracy, unelected, should have $800 billion to spend as he sees fit," said Mr. [Barney] Frank.
He was referring to Bernanke's balance sheet and not to Gerald Ford, in case you were not sure. Here is the link, courtesy of Arnold Kling, who responds: "I just get a chuckle hearing a Congressman complain about someone spending other people's money." Here is Arnold on RTC-like plans.
Posted by Tyler Cowen on September 18, 2008 at 07:08 PM in Political Science | Permalink
Comments
Ron Paul must hear those quotes and be tearing his hair out and screaming, "I've been saying this for how long now?!?!?!?!?"
Posted by: Yogi at Sep 18, 2008 7:27:52 PM
Private companies are inefficient and require nationalization to be run properly.
Friedman is Dead.
Posted by: Oskar Shapley at Sep 18, 2008 7:50:18 PM
Yes, that is a chuckle. it's a funny joke, and a nice shot at those congresspeople with their crazy pork spending. but come on, spending other people's money is part of congress's constitutionally-defined powers. if anyone is going to do it, it's congress.
Posted by: Mike at Sep 18, 2008 7:52:21 PM
The notion of a federal reserve that is responsible to congress is as ridiculous as it is terrifying. I hope that this is election year posturing and not a serious policy proposal.
Posted by: Simon at Sep 18, 2008 8:04:37 PM
"The notion of a federal reserve that is responsible to congress is as ridiculous as it is terrifying. I hope that this is election year posturing and not a serious policy proposal."
You might want to sell it a bit differently. Do you think that a federal reserve that is responsible to the executive is less terrifying?
Posted by: themightypuck at Sep 18, 2008 8:22:21 PM
Ron Paul is probably the only member of Congress that has been telling it like it is. Its unfortunate that cannot communicate that he would be able to lead.
The other candidates seem incapable of formulating independent opinions on this, which is exactly what we need in a chief executive (yikes).
its broken, dude. We need to create an alternative to this mess that can make better decisions than this
Posted by: Alan Brown at Sep 18, 2008 8:48:36 PM
Its good for communication purposes to label things but labeling our system of government as "Democracy" and our economy as "Free Market" hides the reality of how complex (and interwoven) our country is. The rights and power wielded by the Fed are a direct result of the actions of our government over the course of its existence.
From a concept of government structure the Fed is a unitary decision making body which effectively makes it an extension of the executive branch. It is answerable to congress through legislation and the supreme court through lawsuits. The system works since decisions are generally required on short notice but are restricted to operate within the status quo. Laws, which affect the status quo, require multi-party deliberation and thus take more time. In both cases our system is designed around the premise of "asking forgiveness; not permission" which, while possibly a shortcoming of the system, reflects the realities of human behavior. In short, our system is designed around a power struggle as opposed to cooperation; and the power right now rests with the Fed and I haven't seen anything (though I haven't looked much) as to how their power would be limited; nor do I necessarily think, given our government structure, that I would support such limitations; if we are going to live with a visible hand during the good times then we need a visible hand for the bad as well.
I too find the grandstanding of politicians to be annoying and while I realize it is a natural byproduct of our system of government, and our society in general, I find it counter-productive. However, I accept that being a poor, young, intelligent, white, male, non-Christian makes me a strong minority (but not a protected minority) in the eyes of our government; and that people whose platform is "informed decision making and meaningful comprise", as opposed to "supporting your beliefs but winning some and losing some", don't get elected.
Posted by: David J at Sep 18, 2008 9:22:15 PM
Pelosi went on to say, "I am shocked - shocked! - that interest rates are set by a secretive, Illuminati-like group of professors, economists, and former bankers! Who let this happen? Don't we live in a democracy? And by the way, pharmaceuticals should be approved by votes of Congress, not through some cryptic biochemical conspiracy within the FDA."
Sarah Palin, when reached for comment, said, "I find it regrettable but understandable that the Federal Reserve has made interest rates so expensive. Once elected, I plan to reform rates and make them more uniform and consistent across different types of securities. It's my mission from God."
I'm not sure whether to laugh or cry at how trivial and deluded both the election and coverage of it have become. I hope for a speedy return to forgetfulness after November.
Posted by: Greg at Sep 18, 2008 9:34:40 PM
On a more serious note, I hope all of this turns out to be no more than political grandstanding. If the Fed becomes a political football, that would be bad.
If anything, could we just do away with the Fed some time soon and just go to market-based interest rates completely? Maybe the market would have raised rates during the bubble and spared us some of the current dislocation. I suppose we'd probably still want a lender of last resort...
Posted by: Greg at Sep 18, 2008 9:48:18 PM
I don't agree with Kling; Frank mentioned "unelected", at least Congressman have to face the people with their spending.
Posted by: Tom at Sep 18, 2008 10:08:11 PM
Another interesting thing: The WSJ reports that policymakers are considering making a federal insurance system for money-market funds. This makes no sense to me. One money market fund fails--just one--and all of a sudden we need federal insurance for them?
Posted by: blabla at Sep 18, 2008 10:20:11 PM
Looks like the economy is dancing to the tune of this smart guy
Posted by: Smart Guy at Sep 18, 2008 10:25:36 PM
Is there anyone, of any political persuasion or opinion about the bailouts, who believes that these statements are anything but political grandstanding? If the Fed and Treasury had not acted quickly, these same politicians would be excoriating them for ducking their responsibilities. This is just the usual drill: in trying times, politicians try to be seen pointing their fingers at somebody else.
Posted by: David Wright at Sep 18, 2008 10:53:17 PM
Nine people have the right to decide just about everything else without much scrutiny or transparency. Just like Fannie and Freddie were a longstanding anomaly as quasi-public private companies, the Supreme Court is a non-democratic anomaly entrenched squarely at the core of government. So why not a central bank entirely independent of elected government officials?
Posted by: at Sep 18, 2008 11:41:54 PM
There are two issues. (1) Central bank independence and (2) jurisdiction and authority of the central bank. By any measure, the Fed is, at best, operating at the very edge of its authority (if it hasn't already passed the line). If the Fed is operating outside or at the edge of its jurisdiction, it is perfectly reasonable for Congress to start asking serious questions.
Posted by: mgunn at Sep 19, 2008 12:03:52 AM
To what degree is the money being lent by the Fed acquired via the sale of T-Bills/Notes; which at some point it is required to re-pay. Purchasing a T-Bill/Note is a strictly voluntary - free market - action. You give the
Fed your money with the expectation that you will eventually get it back with interest. Admittedly this sounds a lot like a Ponzi scheme but it is how the system has been setup.
The fed's goal is to stabilize the economy by investing the funds acquired via these sales. Until recently this has been of a limited nature taking the form mostly of securities repurchasing but if that money is better spent shoring up an area of the financial system then they should put their money there in order to get maximum returns on their investments. This is not dissimilar to how elected officials operate to control the spending of funds acquired through taxes.
Yes, the taxpaying citizens of the United States are impacted by the presence and use of debt in this way but to point to this specific instance is nothing more than politics in action since we have been acting this way for nearly a century (maybe even more, my history is somewhat lacking but it doesn't affect my point).
Posted by: David J at Sep 19, 2008 12:14:47 AM
Given Congress's track record (hey, let's refuse to reform anything and then give people 600 bucks when the market collapses), they really don't have a case for being exemplars of economic responsibility themselves.
Posted by: DPT at Sep 19, 2008 2:03:05 AM
Clearly, the banking system needs to be insulated from the politicians. They have too much incentive to jigger things to look good this term so they can get re-elected, rather than look to the long term good of their successors in office.
And just as clearly the banking systemk needs to be insulated from the vagaries of public opinion. The public is ignorand and has no idea what is being done to it, much less what would be better.
And it is absurd to let bankers run the Federal Reserve. That'a like letting bank robbers run the police. Foxes guarding the henhouse. Pederasts in charge of the orphanage.
So who can do it?
Posted by: J Thomas at Sep 19, 2008 9:18:07 AM
On a more serious note, I hope all of this turns out to be no more than political grandstanding. If the Fed becomes a political football, that would be bad.
Amen to that. Can you imagine how this would have looked if the Fed was beholden to political overlords? They'd still be bloviating about Bear-Sterns and trying to figure out how it could be spun in Nov.
Posted by: TW Andrews at Sep 19, 2008 9:53:10 AM
Can you imagine how this would have looked if the Fed was beholden to political overlords? They'd still be bloviating about Bear-Sterns and trying to figure out how it could be spun in Nov.
You're being ironic, right? Is there any reason to think they won't be bloviating over Bear-Sterns in November? Unless we get a far bigger disaster to distract them....
Posted by: J Thomas at Sep 19, 2008 9:56:35 AM
Is it only in Texas that they teach you in elementary school that the United States is NOT A DEMOCRACY! It is a representative republic. The differences are subtle, but significant.
Posted by: galen at Sep 19, 2008 7:01:59 PM
Galen, occasionally I meet people who insist that the USA is not a democracy but a republic. They make a big deal about the difference. I always wonder why.
See, we didn't fight the Kaiser for representational republicism. We didn't beat the Nazis for that. We didn't live through 40+ years of Cold War for republicism either. Our government took risks that could have killed everybody on the planet and we accepted it. For Democracy.
And you want to tell us that what we have is not democracy but something else, something that isn't what we want. The more people understand that, the more they'll want to actually get Democracy and not whatever inferior substitute we have.
Is that why Texans get taught about it? So they'll work toward actually creating democracy?
Or is it that they're taught we don't really have democracy so they won't complain about not having it?
Posted by: J Thomas at Sep 20, 2008 10:40:00 AM
