Wright Was Right about the Federal Reserve

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Wright Was Right about the Federal Reserve

September 18, 2015

The announcement that the FOMC decided to maintain the Fed Funds rate unchanged yesterday elicited a collective yawn from the media and markets as this was long a foregone conclusion among Fed watchers. What did raise some eyebrows was the so-called “dot plot,” a chart that is released along with the monetary policy announcement.  The chart displays the (anonymous) forecasts of the individual FOMC members about where the Fed should have its Fed Funds rate at the end of periods from one to three years out as well as in the longer run.  The latest dot plot showed that one member (widely speculated to be extreme inflation dove Minneapolis Federal Reserve Bank President Narayana Kocherlakota)  projected a negative policy rate for September 2016.   But what was even more momentous was the post-announcement press conference, where Janet Yellen did not rule out the possibility that the Fed would never end its zero interest rate policy.  She also said that the Fed is “way below” its inflation target and may overshoot the target even if the unemployment rate is pushed below its target rate.    So as global asset price inflation enters what Brendan Brown calls its “dangerous late phase,” the bubble-blind Fed Chair proposes  permanent inflation at fluctuating and unknown rates to be determined by the discretion of the FOMC.  Yellin's position exemplifies the mindset of the arrogant and entrenched bureaucratic elite that has come to dominate monetary policy all over the globe.   

Yellin's egregious performance at the press conference should serve as a wake-up to the proponents of sound and sane money that the time is well past when the Fed should have had its independence severely restricted or abolished.  The Fed is on the verge of plunging the global economy into an abyss that it may never emerge from. The time to  slay the beast is now and there is a weapon ready at hand. I am referring to Bill H.R. 11 that Rep. Wright Patman (D Texas) introduced when the 89th Congress convened in 1965, but which, unfortunately, never passed.  Its most important provisions included:

The seven member Board of Governors and twelve member Federal Open Market Committee would be abolished and replaced by a Federal Reserve Board of five members who would be appointed by the President to five-year terms.  The President would specify which of the five members would serve as chair.  

There would be an annual audit of the Federal Reserve Board and the Federal Reserve Banks and their branches by the General Accounting Office (GAO), the investigative arm of Congress.  

The fiction of the Federal Reserve as a decentralized, quasi-private entity would be ended.  Federal Reserve “stock” that is “owned” by the member banks would be retired. 

The Federal Reserve Banks would pay into the Treasury all the interest received from their holdings of U.S. securities.  Congress would authorize appropriations to meet the expenses of the Federal Reserve Banks and the Board of Governors.  

An earlier version of the bill was much more radical, setting regular members' terms at four years, installing the Secretary of the Treasury as a permanent member of the Board, and permitting the President to remove any appointed Board member.  Economists who testified in favor of this earlier version of the bill included eminent monetary theorists such as Alan Meltzer, Harry Johnson, Karl Brunner, and Milton Friedman.  In his testimony Johnson said:

a completely independent Federal Reserve System constituted a fourth branch of Government.  He said that the System should be under control of the Executive and Legislative Branches as are other economic policies.

Friedman testified:

 the Fed should be subject to the direct political control of the Administration.  He said the existing arrangement diffuses monetary authority in Government and 'is likely to do more harm than good—as in the past.'  Friedman argued that a 'truly independent monetary authority is most unlikely to achieve' monetary stability.  'Experience shows,' he said, that independent monetary authorities produce monetary instability.  'In addition, it is most undesirable politically to give so much power to individuals not subject to close control by the electorate,' Friedman said.

Subjecting the Fed to regular and rigorous scrutiny by the GAO and making its funding depend, like other bureaus and departments of government,  on regular budgetary appropriations would effectively strip the unelected and unaccountable bureaucrats of the Fed of their “independence” from democratic controls.  The electorate would then be able to hold their elected representatives in the legislative and executive branches directly responsible for monetary policy.  This step, of course, is only the beginning and not the end of the movement back to sound money, which entails a complete separation of government and money.

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