Forbes reports that Fed independence is a myth.
(emphasis mine) [my comment]
Fed Independence Is A Myth
08.03.09, 12:01 AM ET
In a recent opinion piece on the Federal Reserve for the Wall Street Journal, authors R. Glenn Hubbard, Hal Scott and John Thornton argued that the "Fed must above all maintain its political independence in conducting monetary policy." What the authors missed is that the Fed has never been non-political or independent, nor was it intended to be autonomous.
The Fed is not an independent body free of political coercion, but rather an institution whose actions have long been dictated by the president and politicians in power. More important, since Congress is empowered through the Constitution "To coin Money, regulate the Value thereof," it's folly for general defenders of central bank independence to presume that this applies to our own Federal Reserve.
On Jan. 31, 1970, Arthur Burns was sworn in by President Richard Nixon as chairman of the Fed. And while the Fed was at least nominally known as an independent entity, Nixon and others were well aware that the Fed's alleged independence was purely symbolic.
As Nixon noted at the time, excitement over Burns' nomination was "a standing vote of appreciation in advance for low interest rates and more money." Nixon made plain that he had "strong views" on the economy, and said about Burns that while "I respect his independence ... I hope that independently he will consider that my views are the ones that should be followed."
Fast forward to August of 1971, and Nixon was moving in the direction of severing the dollar's all-important link to gold. Burns strongly defended the existing Bretton Woods monetary order, and as Rice University historian Allen Matusow wrote in his book Nixon's Economy, "Burns shrewdly played on Nixon's fears of political injury if he quit the gold standard." Burns pointed out that Nixon would be condemned for "devaluing the dollar," that "Pravda would hail these developments as a sign of disintegrating capitalism," plus it would be "hated by business and financial people."
But as is well known now, Nixon got his way despite Burns' protests against the U.S. leaving the gold standard. Fed officials surely talk up the central bank's freedom to administer monetary policy as they see fit, but as the Nixon years showed, the Fed is very much an agency coerced by politicians.
Moving on to Paul Volcker's reign as Fed chairman from 1979 to 1987, though it was no secret that he quietly lobbied congressmen and senators against the Reagan tax cuts, the supposedly non-political Fed had publicly endorsed Reagan's tax plan in "general terms" according to economics writer William Greider's book, Secrets of the Temple. Discussing the Fed's alleged independence at the time, Rep. Henry Reuss noted that "If Volcker had that much independence in his system, he would have showed it in the summer of 1981. Instead, he supinely went along with the administration's fiscal policy and he certainly didn't object to the instructions he was given."
Ultimately the Reagan administration very much wanted lower interest rates from the Fed to go with its tax cuts, and to some degree the administration got its wish. In return for a rate reduction from the Volcker Fed, tax increases were then put on the table to blunt some of the impact of the 1981 reductions. Far from acting independently, the Volcker Fed traded rate cuts for tax increases despite its desire to keep rates higher than the administration wanted.
Regarding the Volcker Fed's three-year flirtation with monetarism from 1979 to 1982, this policy's stupendous failure nearly made Reagan a one-term president, and pressure from GOP notables including the late Jack Kemp (who called for Volcker's resignation) surely hastened the Fed's departure from the use of quantity targets. Though the Fed's nominal independence allowed it to be stubborn about a policy that was crushing the U.S. economy, it's fair to say that political considerations factored into its welcome decision to ditch a monetary theory that had proved so wanting.
And when it came time for Reagan to make a decision on Volcker's reappointment in 1984, according to Greider, the Fed chairman agreed that he would eventually step down before his term ended so that Reagan could make his own appointment. Greider was also told by high administration officials that in return for Volcker's reappointment, there was an implicit agreement that "the Fed would provide sufficient growth in the money supply to insure sustained economic growth, without inflation." Greider acknowledged that Volcker "vigorously denied that he had ever discussed the conduct of monetary policy in connection with his reappointment," but as he also noted, "the president's men thought they had an understanding with the Federal Reserve chairman."
When Volcker stepped down as Fed chairman in 1987, Alan Greenspan suggested in The Age of Turbulence, his memoirs, that he reluctantly accepted Reagan's nomination to the top central bank post. But as columnist Robert Novak observed in 2007, Greenspan "aggressively promoted himself for the job." Politics, as they always have, played a role in Greenspan's nomination.
And when Bill Clinton took over the presidency in 1993, Greenspan did not behave as an independent observer of the political scene. Rather, Novak reported that Greenspan's choice to sit in between Tipper Gore and Hillary Clinton during the president's deficit reduction speech offended his "Federal Reserve colleagues" who "viewed taking that seat as undermining the Fed's cherished independence." Rather than attempt to obscure the most political of moves, Greenspan prominently displayed the picture of him sitting with Clinton and Gore in his book.
Greenspan's assertion in Turbulence that "a sound budget will bring long-term rates down" made him very much at home with the "Rubinomics" crowd of the Clinton administration, and sure enough, he says he "had an unusually fruitful and harmonious working relationship" with both Treasury Secretary Robert Rubin an d his successor, Lawrence Summers. Impressive company for sure, but a supposedly independent Fed chairman would logically not express opinions about budgetary issues, let alone be tight with political figures in any administration.
And as I wrote in this column two weeks ago, it was no secret that our present Fed chairman, Ben Bernanke, aggressively courted the right for the central bank's top job in 2005. As Reuters columnist James Pethokoukis recently wrote, Bernanke is "now conducting an explicit re-election campaign for another four-year term as Federal Reserve chairman come next January." A truly independent Fed chair would correctly see such blatant politicking as tawdry, and for good or bad, beneath the job itself.
As part of his charm offensive, Bernanke told a town meeting in Kansas City, "I don't think the American people want Congress running monetary policy." In arguing that Congress should vacate its constitutional prerogative when it comes to the coining of money, Bernanke channeled his Fed predecessor, who wrote that if the Fed's discussions were made transparent as some in Congress wanted, "the meetings would become a series of bland, written presentations" in which the advantages of "unfettered debate would be lost."
What all who favor a secretive, independent Fed miss is that not only has history shown the Fed's supposed independence to be mythical, but that the Constitution makes plain that the Fed shouldn't be independent. Even more important, the Fed shouldn't so much be conducting monetary policy as it should be blandly following a price rule whereby the dollar's value is stabilized, preferably in terms of gold. The reality is that we don't need monetary policy, we just need a rule that says the value of the dollar should not be a moving target.
Assuming a price rule was to materialize, there would be no problem in Congress demanding total Federal Reserve oversight, and empowering the Fed to do but one thing: maintain a stable dollar from here to eternity. If so, the Fed would no longer burden the economy with interest-rate machinations and vain attempts at controlling the money supply. The Fed's greatly reduced monetary mandate would likely lead to transparent activity too boring for anyone to watch.
Quick reaction: Fed's independence is a myth.