OBR – Fed Uber Alles

Yes, the Fed wants to do the right thing and raise rates preemptively to maintain price stability. Bernanke and Kohn are dedicated civil servants who made decisions under the worst of circumstances for the good of the nation, not for their personal aggrandizement.Caroline Baum, Bloomberg News

It is somewhat unclear what the estimable Baum intended by this passage.  It came at the end of a article analyzing yet another conundrum of the Fed.  Was it meant to be a concession to head off arguments to the contrary?  Was it an honest portrayal of the Fed chair and his lieutenant?

The Fed has been, at times, on the defensive this past year, against Ron Paul’s Quixotic legislation among other criticisms.  From green shoots to inflation management, Chairman Bernanke has held his own against challenges from all corners.  But so unusual was Baum’s comment.  Bernanke is a civil servant, but he is not.  The Fed, its supporters and others have argued that the Fed should not be audited, should not be directly influenced by “political” concerns, lest its mission of full employment and controlling inflation (despite destroying almost all the value of the dollar since its inception) become compromised.  So did Bernanke and others counter the Audit the Fed legislation.  If the Federal Reserve’s august mission became subject to congressional whim, it would merely become another pork-barrel project.

But if the Fed is not subject to senatorial or representative oversight, these men are not truly civil servants, who should be subject to such oversight.  Indeed, professional economists, who are employed overwhelmingly by either state-supported academia or the government itself, no doubt see the chairmanship of the Federal Reserve as the summit of economeia.  Here we have a sole objective individual, surrounded by reams of data, all referring to the financial markets composed of rational automatons that can be adjusted by deftly adjusting repurchase agreements, reserve requirements, special lending facilities, interest paid on deposits and so forth.  Here is the ultimate control panel for the mathematical Keynesian through to the Monetarist: an imposition of government oversight or, daresay, free-market deregulation of the banking industry to remove its fundamentally necessary central bank, is not only unthinkable, but theoretically impossible, given of course certain assumptions.  For if a simple man’s best friend is a canine, an economist’s most trusted companion is the assumption.

And so becomes the position of Federal Reserve Chairman: a civil servant but accountable to one, lest that accountability compromise the mission of the very service the Fed was meant to conduct.  The Catch-22 of Economics: a Comrade Commissar of Money and Banking supported by the most laissez-faire of those deemed to be serious economists.  To paraphrase Dr. Friedman, where in the world will we find the angels to organize our monetary system as suggested by the models of mainstream economists?  Where will we find those economists who note and study out the fallibility of economic actors, affected by rational ignorance and public choice issues, but are strangely immune to such foibles absent?  Will we ask wherefrom the Fed sprang, whom it serves and just the extent of its powers?  Or will the curtain of the Emerald Palace remain drawn as the fraud persists until the edifice collapses upon the weakness of its internal merits–for there the Soviets have gone, the Fed will go but for the grace of God (who’s surname is not Friedman).


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