The New Republic, in its February 8th issue, carries an article by Danny Vinik entitled Rand Paul Has the Most Dangerous Economic Views of Any 2016 Candidate. It appears that TNR’s fact checkers decamped along with its top journalists. Vinik:
Speaking in front of more than 150 Iowa activists, Paul ripped into the Federal Reserve and promoted his “Audit the Fed” bill, which he introduced earlier this week. “I think there needs to be some sunshine,” he said, according to reports of the event. …
Paul’s bill …would significantly damage the Fed’s independence, which exists so that politicians cannot influence the central bank for their own political purposes. In other words, “Audit the Fed” would lead legislators to interfere with monetary policy matters and put the entire economy at risk.
Whether or not one supports Audit the Fed, the argument really cannot rest on the Fed’s independence. Fed independence currently is a polite fiction. As I have cited before:
As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):
“Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington.”
Forbes.com contributor Dr. Norbert Michel recently published a column here relying on the rather shabby tactic of citing empirical evidence to demonstrate how dubious is the claim of Fed independence. Michel:
Here are just a few examples (with Fed Chair dates provided):
- William Martin (1951 – 1970). President Eisenhower directed his Treasury Secretary to put the “utmost pressure” on Chairman Martin to “get a greater money supply throughout the country.” When Martin refused, Eisenhower pressured him to resign or reconsider. Martin reconsidered.
- Arthur Burns (1970 – 1978). President Nixon repeatedly worked with Burns to secure easy monetary policy with the view that it would help win elections. On one of Nixon’s famous tapes, Nixon and Burns openly mocked the idea of Federal Reserve independence.
- G. William Miller (1978 – 1979). President Carter found Miller uncooperative, so he replaced him as Fed Chair (he made Miller his Treasury Secretary).
- Paul Volcker (1979 – 1984). Ronald Reagan openly cultivated a working relationship with Volcker and repeatedly asked him for tighter monetary policy. Alan Greenspan reports that, in one meeting, Reagan reminded Volcker that the Federal Reserve Act was subject to change.
- Alan Greenspan (1987 – 2006). Alan Blinder, appointed to the Fed Board by President Clinton, publicly suggested Greenspan was catering to Clinton.
- Ben Bernanke (2006 – 2014). A 2012 New York Fed publication notes: “The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship…. This relationship proved beneficial during the 2008-09 financial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.”
Perhaps the Fed’s defenders have some other definition of independence in mind?
The issue of central bank independence from political meddling is a venerable one. As the New York Fed’s Liberty Street Economics eruditely notes, in a recent column anticipating Valentine’s Day:
John Keyworth, curator of the Bank of England’s museum, has provided on the Bank’s website a full explanation for why the institution is called “The Old Lady of Threadneedle Street.” It stems from an elaborate 1797satirical cartoon created by James Gillray. The author’s words best explain what is going on in the cartoon:
“The cartoon shows the Prime Minister of the day, William Pitt the Younger, pretending to woo an old lady, the personification of the Bank, but what he is really after is the Bank’s reserves, represented by the gold coin in her pocket, and the money-chest on which she is firmly seated.”
Unsurprisingly, this action was seen by the Government’s detractors as outrageous and Sheridan, representing the Whig opposition, described the Bank as ‘an elderly lady in the City who had . . . unfortunately fallen into bad company’.
There is a certain irony. Sen. Paul might be counted as one of the great champions of protection of the Fed from abuse by the political authorities. It is very probable that Sen. Paul’s motive is to rescue the Fed from having “unfortunately fallen into bad company.” Although the Fed, the Democrats, and leftish economic commentators may dispute his chosen means they may share a common ideal: high integrity monetary policy.
Fed independence from political meddling — which I support — actually became crippled when Lyndon Johnson, in the wake of the Tet Offensive, closed the London gold pool. It died when Richard Nixon closed “the gold window” in 1971. It is after he genuflects to the shibboleth, though, that Vinik really goes off the rails:
But a Paul presidency would still have disastrous effects on the U.S. economy, for other reasons that were on wide display in Iowa on Friday night.
“Once upon a time, your dollar was as good as gold,” he said. “Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.” Paul’s comments make very little sense. When Paul asks what backs the U.S. dollar now, he’s effectively asking what makes it valuable. When the U.S. used a gold standard, it meant that a dollar was worth a certain amount of gold. Economists overwhelmingly agree that that was a terrible idea, but the connection seemed to explain why dollars had value. …
“What Paul and his followers are concerned about is the purchasing power of the dollar. They want to return the U.S. to the gold standard to ensure that inflation doesn’t undermine the actual purchasing power of the dollar. Over the long run, a gold standard would guarantee that price stability. But over the short run, prices would still fluctuate violently, as happened when the U.S. used the gold standard.
“In terms of current policy, goldbugs, as they are often called, think the Fed’s recent decisions—its zero interest rate policy and bond-buying program—will cause skyrocketing inflation and reduce what you can buy with dollars.”
There is so much just factually wrong about this that one hardly knows where to start.
To be continued.