Fed Up with Fed Up

When I heard about a group called Fed Up that wanted to reform the Federal Reserve Bank I was initially encouraged. Everyone is fed up with the Fed. The Fed has become increasingly politicized as it tries to fulfill its politically motivated mandate to not only control inflation but to also maximize employment. Even the most die-hard Keynesians are beginning to admit that the Fed has little ability to impact employment numbers. For years now the Fed, along with central banks of other developed countries, have been keeping interest rates extremely low and, in some case, negative in the hope of goosing their economies. The resultant asset bubble has been a great benefit to the already wealthy that hold assets but has been devastating to small savers and retirees who are looking for a little fixed income return without taking on excessive risk. The Fed is definitely in the need of reform and the first action that needs to be taken is to repeal the Humphrey-Hawkins legislation that created the Fed’s dual mandate.

Imagine my disappointment when I learned that Fed Up is a campaign created by the left-leaning Center for Popular Democracy. They want to further politicize the Fed by bringing the 12 regional banks fully under government control and replacing the bankers and businessmen currently on the Boards of Directors of the Regional Fed Banks with politicians and academics. They are also campaigning for greater diversity of those boards, a move endorsed by congressional Democrats and the Clinton campaign. I am all for diversity but replacing an experienced banker with a black or Hispanic academic who has never seen a financial market except from an ivory tower makes no sense to me.

Central bank independence is key to its ability to maintain stable prices and moderate long-term interest rates. Although the Fed isn’t charged with managing the dollar exchange rate, many other central banks have that responsibility as well (as the world’s reserve currency other central banks try to manage their exchange rate against ours - we have no other currency to manage against). This independence protects a country’s currency and financial markets from political manipulation.

Leftists consider the central bank to their personal piggy bank. Everyone in Honduras saw the video of the Minister of the Presidency of left-wing president Mel Zelaya wheel 40 million lempira (about $2 million) out of the Central bank of Honduras with the intention of using the money to influence an election to keep Zelaya in power. Zelaya was a Hugo Chavez wannabe (but in execution was more akin to Nicolas Maduro).

The Central Bank of Venezuela under Chavez and now Maduro has been complicit in that country’s downward spiral (although spiral is not sufficiently descriptive of that country’s vertiginous decline). The Central Bank maintains the official exchange rate for the national currency (the so called bolivar fuerte) at BsF9.95 = $1.00. Meanwhile, the website DolarToday quotes the black market exchange rate for the strong bolivar at 1015.49. With the strong bolivar you cannot import anything, a policy that has translated into barren store shelves, food riots and starving people.

With progressive Democratic politicians and left-wing Socialist (when not Communist) academics with the appropriate ethnic background in charge of the Fed, our economy would soon be in a shambles, just like Venezuela.

Yes, the Fed needs reform. It needs to be reformed so it can do what central banks are best at when not subject to political manipulation: maintaining stable prices and moderate long-term interest rates (which implies no long term inflation expectations). This is a reasonable and limited mandate well within the powers of the Fed. The Fed is charged with overseeing the free market financial system. Fed Up sees the free market financial system as antagonistic to their progressive goals. The reforms proposed by Fed Up are the first step toward eliminating the market from the financial system.

Trying to crank up the Fed to be some sort of super-charged Keynesian engine for growth is unrealistic and dangerous. Progressives believe that the central bank has the ability to run the economy – when backed by the coercive power of the state. Just ask Nicolas Maduro.