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.


"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.


Ron Paul must hear those quotes and be tearing his hair out and screaming, "I've been saying this for how long now?!?!?!?!?"

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.

"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?

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.

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...

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?

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.

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.

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.

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.

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.

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