Last week, President Donald Trump
set the economics community aflame by suggesting that he will appoint businessman and presidential aspirant Herman Cain to the Federal Reserve Board. Even more than political economist Stephen Moore, the critics maintain, Cain represents a threat to the cabal that has controlled the central bank for decades.
set the economics community aflame by suggesting that he will appoint businessman and presidential aspirant Herman Cain to the Federal Reserve Board. Even more than political economist Stephen Moore, the critics maintain, Cain represents a threat to the cabal that has controlled the central bank for decades.
Why? Because Cain is a successful executive who founded a real business, took risks, and created jobs, things most academic economists will never ever do.
Media outlets and other allied constituencies have howled with rage at the prospect of President Trump “packing the Fed,” a distant reference to attempts by President Franklin D. Roosevelt to pack the Supreme Court in the 1930s. Those worried about the independence of the Federal Reserve Board should reconsider. Independence from what exactly?
While the Fed is meant to be independent from the executive branch on a day-to-day basis, it is certainly not independent of Congress or the law. Yet the Fed in recent years has shown a troubling tendency to deviate from its legal mandate and make up new authorities to fit the changing economic situation. Case in point: the dubious notion that we should seek a 2 percent rate of inflation.
Anybody who cares to read the 1978 Humphrey Hawkins law will know that the Fed is directed by Congress to seek full employment and then zero inflation. Not 2 percent, but zero. Yet going back a decade and more, the Fed, led by luminaries such as Janet Yellen and Ben Bernanke, has advanced a policy of actively embracing inflation. And neither Bernanke nor Yellen bothered to consult Congress when they decided to discard their legal responsibilities.
Quantitative easing
, to take another example, represents a vast inflation of the financial markets and housing, yet Fed officials actually appear in public and talk about the conundrum presented by “low inflation.” The inflation in home prices that occurred during and after the Fed’s purchase of trillions in securities has permanently raised the price of housing in many parts of the country, preventing millions from purchasing homes. Yellen confesses to be “perplexed” by the dearth of home purchases by young families, but she is the cause of the malady.
, to take another example, represents a vast inflation of the financial markets and housing, yet Fed officials actually appear in public and talk about the conundrum presented by “low inflation.” The inflation in home prices that occurred during and after the Fed’s purchase of trillions in securities has permanently raised the price of housing in many parts of the country, preventing millions from purchasing homes. Yellen confesses to be “perplexed” by the dearth of home purchases by young families, but she is the cause of the malady.
Not only are these pro-inflation policies in violation of the letter of the Humphrey Hawkins law, but they have contributed to increased volatility in the financial markets. The third and frequently forgotten mandate in the Humphrey Hawkins law commands the Fed to employ policies that will produce “stable interest rates.” But the economists have long since stopped talking about this.
The basic problem with the Fed today is that it has gradually fashioned a new set of rules for itself, particularly since 2008, on which Congress has never been consulted. In the same way that economists use their imaginations to concoct new theories about economic behavior, the Fed board has apparently decided to take up legislative powers as well. Is the Fed meant to be free of any real-world restraint on its actions?
- Source, The American Conservative