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The Folly of Fed Obeisance

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As if to get my work week off to rotten start, my otherwise good pal Don Boudreaux greeted me first thing Monday morning with a link to Robert Samuelson's Sunday evening Washington Post op-ed on "The Folly of Fed Bashing." In it, Samuelson takes the Fed's conservative critics to task for their "misinformed" attacks on the Fed, faulting them for failing to appreciate how much more transparent the Fed's operations are today than they were some decades ago, and for not understanding that its actions, however undesirable they may seem, are generally "necessary for the nation's long-term economic health." As for the perception that "the Fed is a large and aloof agency that needs to be tamed," it rests, Samuelson says, on a "simplistic" view of the Fed's history.

Well I can't speak for others, but I know something about the Fed's history. And I've come to the conclusion, informed by careful consideration, over the course of several decades, of that history, and the history of numerous other monetary arrangements in the U.S. and elsewhere, that the Fed is actually…a large and aloof agency that needs to be tamed.

True, the Fed is in some respects more transparent than it used to be. But it has also been doing things that it never used to do. The ordinary Fed publications and disclosures to which Mr. Samuelson refers shed no light at all on many of these novelties. Not for nothing did Dodd-Frank provide for a special, one-time audit of the Fed's crisis-related undertakings. Among other things, that audit pointed to some serious conflicts of interest that might otherwise have escaped censure. Yet according to Mr. Samuelson's supposedly up-to-date Fed history, it should have been just as unnecessary as the recurring audits Fed "bashers" have been calling for.

Would such recurring audits themselves be otiose? The Dodd-Frank audit covers the Fed's actions up to July 21, 2010. Consequently the GAO isn't allowed to look into any of the Fed's unorthodox measures since then, including later rounds of Quantitative Easing, Operation Twist, and its enhanced overnight reverse repo program, not to mention its stress tests and other financial-regulatory measures. More importantly, under existing law it can't be asked to look into any "emergency" steps the Fed might take in the future. Should we always have to rely on special legislation after the fact to allow Congress to scrutinize unusual Fed actions?

Mr. Samuelson complains about simplistic history. Allow me to complain instead about simplistic conjectures about the future–conjectures to the effect that the Fed will never again engage in the sorts of activities that warranted the Dodd-Frank audit. Such conjectures are after all implicit in claims, like his, to the effect that a permanent enhancement of the GAO's Fed-auditing powers would only serve to "fulfill conservatives' political agenda" by allowing Congress to "harass" the Fed and to otherwise undermine its ability to do its job.* Does Mr. Samuelson believe that the GAO "harasses" the other government departments and agencies over which it has unlimited auditing powers? If not, why does he worry that it would harass the Fed? Conservative agenda? Does he think that only conservatives (or conservatives and libertarians) distrust the Fed, and welcome GAO scrutiny of its unusual activities? If GAO officials themselves argue for relaxing present limits on their agency's Fed-auditing powers, must they be part of a conservative plot?

Samuelson also sees "no obvious advantage" in a measure that would compel the Fed to choose and stick to a monetary rule, such as a Taylor Rule or NGDP growth rule. But while the advantage of such a rule may not be obvious to him, others may find it obvious enough. Either a Taylor or a Sumner-style NGDP growth rule would have called for less expansionary monetary policy in the mid-2000s, and for more expansionary policy in late 2009–reason enough to wonder whether, in complaining (in Samuelson's words) that a rule "might make policy too inflexible," Janet Yellen bothered to consider how in practice policy tends to "flex" the wrong way.

Finally, although he recognizes that the Fed isn't infallible, and even suggests that the recent financial crisis was proof of its fallibility, Samuelson remains convinced that the Fed's unhindered exercise of almost unlimited discretionary powers has contributed more than rule-based arrangements might to "the nation's long-term economic health." On what, I wonder, is this judgment based? Certainly not on recent experience. But a longer view is just as hard to square with the assertion, as Milton Friedman and Anna Schwartz went to great lengths to demonstrate. Mr. Samuelson worries that Fed "bashing"–by which he seems to mean any criticism of the Fed that seeks to justify a reduction of its considerable power–"adds to uncertainty and subtracts from confidence" upon which economic growth depends. In truth, the Fed's actions are themselves often unpredictable, and especially so when it comes to their influence on the long-run course of prices and spending. Were the Fed really a sort of Ambrose Light of financial markets, as Mr. Samuelson imagines it to be, Fed watching, instead of being a growth industry, would be about as useful–and as boring–as watching paint dry.

But the Fed needs more than mere watching. It needs scrutiny. It needs criticism. Above all, it needs to be reined in–not for conservatives' sake, but for everyone's. Mr. Samuelson may not like it. But I, for one, intend to keep bashing away.
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*Like many commentators who take the Fed's side in the "audit the Fed" debate, Samuelson suggests that there only two possible kinds of GAO audits to which the Fed might be subject: simple "do the books balance" audits, as are already provided for, and ones by which the GAO would "second guess" the Fed's conduct of ordinary monetary policy. In fact, the Fed does a lot more than engage in ordinary monetary policy, and, as the special audit provided for in Dodd-Frank illustrates, there are correspondingly many ways in which the GAO might scrutinize it's conduct. The real debate is about these other sorts of scrutiny. To represent it as a debate about whether the GAO (or "Congress") should be allowed to interfere with the Fed's conduct of monetary policy is missing the point, if it isn't something rather worse than that.

  • http://thelastembassy.blogspot.com/ W.E. Heasley

    “The present economy also dampens Fed criticism. Along with many others, the Fed is rightly blamed for the financial crisis, but its policies since then have contributed to a steady, if unspectacular, recovery.” – R.J. Samuelson

    Believe it was Milton Friedman that said [paraphrasing]: Since the Fed’s inception it has done more harm than good.

    Hence Samuelson is stating that since the Fed’s inception it has done more good than harm.

    Hmmm. Friedman vs. Samuelson…..best to go with Friedman.

    By-the-way, love the picture under the headline, The Wizard of Id….err OZ.

    • George Selgin

      Thanks for the remarks, W.E.H. Like many, Samuelson simply assumes that we should thank, rather than blame, the Fed for the "unspectacular" post-2008 recovery. And "unspectacular" is putting it mildly: the recovery has been by far the slowest since WWII. It also remains, more than 6 years later, far from satisfactory, with labor force participation lower than at any other point since the downturn, and lackluster productivity. In other words, a "recovery" that has the economy producing a lot less than it ought to.

      Furthermore, empirical studies of the Fed's contribution to this crummy recovery offer no grounds for Samuelson's suggestion that Fed interventions made a substantial and positive difference. Most find small effects only, and some no substantial effects at all. And even these studies tend to look only at the impact of Fed policies on long-term interest rates, without asking whether lowered rates in turn led to any substantial gains in spending or employment.

      In few words, Samuelson's views seem to rest more on certain prior convictions than on actual evidence.