Browsing the blog archives for July, 2014.

The Federal Reserve Accountability and Transparency Act (FRAT)

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Congress is currently considering a reform measure that looks seriously into the inner workings of the Fed. The Federal Reserve Accountability and Transparency Act (FRAT) is long overdue and doesn’t go far enough, but it’s already getting criticism from Keynesians. The argument is really quite simple.

The Federal Reserve was established in 1913 for a number of reasons, most notably to lend stability to the U.S. banking system and control inflation. However, U.S. banking has experienced considerable instability since the Fed’s creation.  The dollar increased in value by 13% in all of the years prior to 1913, but has decreased by 92% since the establishment of the central bank. Keynesian economists argue that Fed intervention through changes in the money supply and interest rates has kept the inherent capitalist business cycle under control. Austrian economists argue that Fed activity has actually caused much of the inflation and economic instability we’ve experienced. This issue has been addressed in previous posts so I won’t discuss it in detail here. Suffice to say that one’s position on this issue likely determines one’s view on FRAT.

Keynesian Alan Blinder’s op-ed in the Wall Street Journal summarizes the argument against FRAT. For Keynesians, the central issue here is the extent to which the Fed can operate “free of political influence.” If Congress “audits” the Fed, then Congress—not economists—will politicize the Fed. It might sound good to “keep the politicians from screwing up the economy,” but this argument is severely flawed. Of course, the politicians have already screwed up the economy to the tune of a $17 trillion deficit, and the same crowd that doesn’t want politicians involved in Fed activity is calling for Congress to raise the minimum wage, pass an amnesty plan for illegal immigrants, and raise taxes on “the rich.” The hypocrisy of this argument should be obvious.

There’s a deeper argument here that’s more disconcerting. Liberals argue that “independent experts” should control the economy through the Fed in the same way that the so-called experts should be empowered to run other parts of the government. Individuals aren’t smart enough to decide what to eat, how much to exercise, and when to see a doctor, so healthcare experts should tell us. The marketplace cannot be trusted with protecting the environment, so climate change scientists should set policy. Workers aren’t capable of saving for retirement, so we should be required to cough up more than 12% of our paychecks and let the social engineers in Washington tell us what portion we can get back when we retire.

But leftists are providing a false choice. They frame the debate as one between politicians and experts, but they leave out the third option, the individual. It doesn’t really matter whether politicians or Fed economists centrally plan the economy. In either instance, the best option—individuals through the free market—is being thwarted. Both handouts from politicians and artificially low interest rates orchestrated by the Fed must be paid for sooner or later. We’d be much better off if both groups stayed on the sidelines and empower the invisible hand of the market.

The next time someone tells you that the Fed should be able to conduct its affairs without Congressional oversight, ask why it’s okay for politicians to be directly involved in so many other forms of economic central planning—but not the Fed.

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