Why is the Federal Reserve the sacred cow of American politics?
It’s not because it has done a stellar job. Its fundamental, serial errors in the 1970s, after the U.S. blew up the gold-based Bretton Woods international monetary system, gave us and the world the Great Inflation and a discouraging, debilitating decade of stagnation. The Fed’s pursuit of a weak dollar, which started in the early 2000s, has been an unmitigated disaster. It created the horrific housing bubble. Ben Bernanke’s destructive experiment known as quantitative easing distorted the credit markets, thereby unfairly helping Washington pile on debt (“deficits without tears”) while making it harder for small and new businesses–the job creators–to get loans.
In no small part because of the Fed, the recovery from the terrible downturn of 2008–09 has been the worst in American history.
The Federal Reserve is the most powerful agency in Washington, yet it has a fraction of the oversight that our intelligence agencies, including the NSA, have. Congress doesn’t even hold the power of the purse over the Fed. The agency gets its operating money not from congressional appropriation but from the interest it gets on its bonds, which it buys with money it creates out of thin air.
The Republican National Committee recently passed a resolution, by the unanimous vote of its National Committeepeople, calling for the creation of a national Monetary Commission. This legislation is prime sponsored in the House of Representatives by Joint Economic Committee Chairman Kevin Brady (R-Tx) and in the US Senate by Republican whip John Cornyn (R-Tx).
Cato, with a representative from Heritage, recently conducted a panel on Capitol Hill on this same proposed Commission.
Policy does not grow on trees. Policy comes from people who command attention and have, and win, arguments. As the attention-commanding RNC together with two of the capital’s leading think tanks indicate, a good argument is brewing. America needs to have and win an argument about the role of good money — as in Fed policy — in fostering, rather than retarding, a climate of good job growth and equitable prosperity.
The musty old document that supposedly governs this country, the Constitution of the United States put into practice way back in 1789, makes no provision for the governmental institution that has proven the most influential of our time: the Federal Reserve. About the only clause in the whole multi-page document that might even remotely pertain to authorizing a Federal Reserve is this expression from Article 1, Section 8:
“The Congress shall have Power To….coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures….”
That’s it. You can search the document up and down for lines referring to the monetary authority of the country, and all that will turn up is stuff on Letters of Marque, Presidential Electors, and permission to tax slave imports up to $10 per.
It is not the case that banking, much less “central banking”—or paper money for that matter—did not exist 225 years ago, such that the Founders could have authorized a Fed had they ever heard of such a thing. Paper money was a “warehouse receipt” for gold or silver coin (or bullion) that an institution kept because it was more convenient for the owner of the money to conduct affairs without hauling precious metals around on one’s person.
In the past twelve months the federal government has increased the national debt held by the public by $697 billion while the total debt has grown by $820 billion. Since revenue collected by the government is at record highs, these enormous deficits must be due to spending. Among the many extraordinary measures taken by the Federal Reserve over the past five or so years are several that are serving to enable President Obama and Congress in continuing to spend with little, if any, restraint. If we hope to get spending under control, it would help if the Fed stopped encouraging so much wasteful spending.
The Federal Reserve believes, with little evidence over the last five years to back them up, that government deficit spending and low interest rates can stimulate the economy and boost economic growth. The Fed has significant influence over interest rates, but no role in federal spending or taxes, so how does it enable the federal government in running deficits? The answer is by its purchasing of Treasury securities which holds interest rates down and its refunding of all its profits to the Treasury.
The Federal Reserve’s seemingly endless program of quantitative easing (QE) begun under Ben Bernanke, and continuing at a slightly slower pace under Janet Yellen, has some of the punditry and much of the electorate up in arms. With good reason.
Implicit in quantitative easing is the horribly obtuse notion that central banks can produce real economic growth through their monetary machinations. If only life were so simple.
Back in the world of the reasonable, the sole purpose of money is as a stable measure of value that facilitates the exchange of goods and investment. Quantitative easing, by its very name, involves the corruption of money’s sole purpose as a stable medium of exchange.
In that case it must be stressed that QE has in no way boosted growth. The latter results from investment in new and existing commercial concepts, and for destabilizing the value of money, QE works against the very investment that would drive economic growth.