Prominent Economists: Leave the Fed Alone

Here’s a petition that’s been signed by a slew of well-known economists (you can see the names at the link):

Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.
First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.
Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.
If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.

Earlier this week, my in-box was crammed full of morons who insisted in perpetuating the lie that the Federal Reserve is a private bank. However, I’ve never fully understood the sacredness of central bank independence. Why is this some great ideal? The Fed is a dependency of Congress and I don’t see what’s wrong with treating it that way.
Can anyone point to an instance of where Fed independence turned out to be helpful? Perhaps the early 1980s but I highly doubt Paul Volcker would have intimated by anyone. The Fed doesn’t need to be independent. It does need to have latitude and flexibility within a framework of Congressional oversight. If the Fed fails to do its job well, that’s a political issue and politicians should be held accountable.
The function of the Fed has changed a lot in the past year and I think it’s reasonable to revisit some core assumptions. Questioning the Fed’s independence is a good start.

Posted by on July 15th, 2009 at 2:48 pm


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