Monday, July 20, 2009

What Fed Indpendence?

Responding to criticisms of the Federal Reserve, a number of prominent economists have signed a petition that calls for Congress and the Executive Branch to "reaffirm their support for and defend the [Fed's] independence as a foundation for U.S. economic stability." While I support the Fed independence, I also recognize the Fed is ultimately a creation of Congress and is therefore subject to political pressures. These political pressures are bound to get stronger in times of economic crisis. In the current crisis these political pressures have become pronounced for the following reasons: (1) the Fed has made large scale interventions into the economy that involve picking winners and losers; (2) some of its interventions will generate quasi-fiscal costs; and (3) many observers believe the Fed played an important role in creating the crisis. To hope that Congress will embrace the petitioners' call for maintaining the Fed's independence given these developments is naive at best and counterproductive at worst. Some members of Congress and other observers may see this petition as a call to maintain Fed secrecy by a bunch of economists associated with the Fed. For example, see this post and this follow-up one at Zero Hedge. Will Wilkinson suggests that the advocates of the Fed's independence would actually strengthen their case by actually embracing the calls for an audit of the Fed:
One reason to want an audit of the Fed is to establish whether or not it has actually been acting with sufficient independence. The question is already in the air. To attempt to impede an inquiry into the question by stressing the high value of independence is obviously to beg the question. Those who prize independence, if they really do, ought to be all the more keen on an inquiry.
Given the three developments mentioned above I think Wilkinson is correct. Increased transparency will only help the Fed moving forward.

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