Saturday, November 20, 2010

Is It Time For the Federal Reserve to be Brought Down a Peg or Abolished?

Let's learn as Americans all we can about "The Federal Reserve" because they have done much damage to our economy at different times ever since its creation in 1913 with the "Federal Reserve Act". We can only hope now that the great champion of abolishing the Federal Reserve, Senator Paul Ryan the incoming Chairman of the House budget Committee will now be successful at least at reining it in.

If there is a silver lining to the uproar over the Federal Reserve's decision to create $600 billion in new reserves in the next few months, it is the renewed public attention to the Fed's impossible dual political mandate for stable prices and maximum employment.

To be specific, Paul Ryan suddenly has company. The Wisconsin Congressman has since 1999 proposed legislation that would let the Fed focus monetary policy solely on the goal of stable prices. This week he's been joined by fellow Republicans Mike Pence of Indiana and Tom Price of Georgia, while Senator Bob Corker of Tennessee told us he plans to work with Mr. Ryan to introduce legislation next year that would lift the dual mandate. If the 112th Congress did nothing else, this would be worth the price of its election and a major contribution to better economic policy.

These columns have decried the dual mandate since it became the law of the land in 1978 with the Full Employment and Balanced Growth Act, aka Humphrey-Hawkins. To appreciate the problem, consider that in the original Federal Reserve Act of 1913 Congress asked the central bank to supervise banks. It did not mention explicit economic goals. Even in the Keynesian heyday of the Employment Act of 1946, Congress did not ask the Fed to manage the economy.

But with Humphrey-Hawkins, Congress ordered the central bank to "promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." The political context in that age of Jimmy Carter will sound familiar. U.S. unemployment was stubbornly high and the fiscal policies (tax rebates) of a Democratic Congress had failed to stimulate. So the politicians decided to conscript the Fed in its job creation mission by ordering the ostensibly independent central bank to target employment as well as prices...
READ the rest at "The Fed's Bipolar Mandate" at The Wall Street Journal.

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