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The Real Fed Sweepstakes

It’s policy that counts, not personalities.

Aug 12, 2013, Vol. 18, No. 45 • By JUDY SHELTON
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Summers has adherents as well, particularly among economic policy veterans from the Clinton administration such as Gene Sperling and Robert Rubin. He is seen as someone who can be counted on to perform confidently in a financial crisis, taking command when others are paralyzed by fear. Given the Fed’s key role in fomenting such events, the ability to conduct lender-of-last-resort functions with verve may come in handy indeed. Too bad we can’t choose someone with the same qualities that should characterize management of the money supply: someone wonderfully boring, predictable, and reliable.

The sad fact for those of us who think the Fed’s extraordinary interventions are doing more harm than good—distorting market signals and misallocating capital to the detriment of productive economic activity—is that both Yellen and Summers would continue with the dovish policies of pumping in excess liquidity in the vain hope of reducing unemployment. They both embrace the notion that monetary illusion can induce real economic gains; they both accept the broadest mandate for the Fed to justify its dominance in determining economic outcomes.

It’s interesting that Paul Volcker, the former Fed chairman who actually demonstrated that political independence from the White House and Congress was a virtue, has recently been suggesting that the Federal Reserve is attempting to do too much, taking on “responsibilities that it cannot reasonably meet with the appropriately limited power provided.” In a speech before the Economic Club of New York in May, Volcker criticized the idea that monetary policy should be directed toward achieving both price stability and full employment:

I find that mandate both operationally confusing and ultimately illusory: operationally confusing in breeding incessant debate in the Fed and the markets about which way should policy lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic; illusory in the sense it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel Prize winners but by experience.

Is it too late to consider recruiting Volcker back to the task? Would those 18 or so Senate Democrats who signed a letter urging Obama to appoint Yellen because of their concerns about Summers having favored banking deregulation be drawn to the man behind the eponymous “Volcker Rule” that would prevent banks from engaging in speculative trading for their own accounts using depositors’ money? Probably not; being a male, Volcker is at a distinct disadvantage. And not having visited the White House some 14 times in the last two years, he can’t claim the insider edge.

It’s a shame, because our economy may well be headed for another round of bubbles and bailouts. Already, housing prices reflect the excessive liquidity. Favored patrons of large financial institutions can flip real estate for profits while first-time homebuyers, shunned by snakebit community banks, are frozen out.

Instead of engaging in feverish whisper campaigns to slide favored appointees into the world’s most powerful financial position, what we should be discussing is whether the Fed’s outsized role in determining the price and availability of credit is beneficial to economic performance. Legislation to establish a bipartisan commission to examine the long-term impact of monetary policy—on output, employment, prices, and financial stability—was introduced in March by Rep. Kevin Brady, chairman of the Joint Economic Committee. It now has 23 cosponsors and seems to be gathering momentum as Congress slowly recognizes the magnitude of the Fed’s influence in allocating financial resources and the scope for economic failure in the wake of monetary miscalibration.

Maybe it’s time to acknowledge the Fed elephant in the room instead of dancing around the root causes for the global financial breakdown that launched our most recent dismal recession. When the president inveighs against the “rising cost of groceries” in his economic speeches or refers to the evils of “a housing bubble, credit cards, and a churning financial sector that kept the economy artificially juiced up” before he took office in 2009, as he did last week, let’s not allow the role of monetary policy to be dismissed in favor of invoking human greed or the shortcomings of markets.

And when Obama claims that “we’ve cleared away the rubble from the financial crisis and begun to lay a new foundation for stronger, more durable economic growth,” let’s challenge him with a fundamental question: How can you lay a foundation for stronger, more durable economic growth without first laying a foundation for sound money?

Judy Shelton, an economist, is author of Money Meltdown and codirector of the Atlas Sound Money Project.

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