A different path for the Fed

by Russ Roberts on October 9, 2013

in Monetary Policy

Amar Bhidé makes the case for more rules and less discretion at the Fed. More rule of law. Less rule of woman. An excerpt:

America’s system of government imposes particularly strict constraints on officials’ actions, reflecting a deep-rooted skepticism of philosopher-kings. Its political institutions are based on a carefully calibrated system of checks and balances, which, by enhancing accountability, helps to control the misjudgments and self-dealing of those in power. Where beliefs and interests diverge, America’s system favors open debate that accommodates a wide range of views. After all, people are more willing to consent if their dissent has been heard.

But checks and balances can also impede crucial reforms. Indeed, they are part of the reason why the United States did not establish a permanent central bank until the Federal Reserve Act of 1913 – long after the United Kingdom, France, and Germany – and, even then, authorized it only to prevent financial panic and monetary collapse. The fact that the Federal Reserve System comprises 12 regional reserve-holding banks reflects the fear at its founding that Wall Street financiers would otherwise capture monetary policy.

How things have changed. Today, enormous power is concentrated in the hands of the 12-member Federal Open Market Committee, which sets interest rates and regulates the money supply behind closed doors – decisions that are not subject to review or challenge. Retirees can sue if their homes are seized for urban renewal, but not if the Fed’s financial suppression deprives them of a return on their savings.

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