Steve Mnuchin Defends the Myth of Fed Independence


One of the biggest surprises during Donald Trump’s unconventional presidential campaign was his frequent criticism of the Federal Reserve. Though he was highly inconsistent on what he thought the Fed should do, coming out as both a critic and advocate of the current low interest rate policy, he was steadier in his dismissal of the Fed as an independent institution.  During one of the debates, he went as far as to accuse Fed Chairwoman Janet Yellen of “being…more political than Hillary Clinton.”

While it is possible Donald Trump may still believe this, it is clear his Treasury Secretary does not.

Responding in writing to questions from Senator Bill Nelson, Steve Mnuchin described the Fed as “organized with sufficient independence to conduct monetary policy and open market operations.” He also praised “the increased transparency we have seen from the Federal Reserve Board over recent years.”

While Mnuchin’s response does not explicitly criticize the movement to Audit the Fed, the leading critics of the effort have always pointed to the Fed’s independence as a primary reason for their opposition. They faithfully parrot the same line offered by Chairwoman Yellen and her predecessor that a GAO audit of their operations would allow partisan politics to interfere with the judgement of the Federal Reserve.

Unfortunately this position is at best naive, and at worse purposefully misleading.

After all, as former Congressman Scott Garrett grilled Yellen on last year, Federal Reserve officials regularly meet and strategize the executive branch and have worked in cooperation on major pieces of government policy, such as Dodd-Frank regulation and TARP. By making the Federal Reserve an explicit working partner with the Administration, it has become little more independent than any other Federal agency – especially considering its head is chosen by the President.

While it’s true that these actions were required due to the increased responsibilities placed on the Federal Reserve by Congressional legislation over time, this doesn’t change the reality that the Fed has far from the “bankers bank” designed to simply be a “lender of last resort” that it was originally sold as.

Far from being sterile technocrats acting in some apolitical vacuum, Federal Reserve officials have even actively engaged in partisan politics – as shown last year when Hillary Clinton received thousands of dollars in campaign contributions.

Further, Fed partisanship is hardly a new phenomenon. As the diary of Arthur Burns exposed, the form Fed chairman often worked behind the scenes with the Nixon Administration, frequently talking with the president in secret. Burns went as far to say he was Nixon’s “best friend” and supported his closure of the gold window due to personal affection even though he didn’t support the policy.

Political gamesmanship certainly wasn’t limited to Burns. The relationship between Alan Greenspan and the H. W. Bush Administration soured during its four years, with Bush’s Treasury Secretary going as far as to cancel their weekly meetings. As a result, many viewed Greenspan’s refusal to lower interest rates as a way to fuel the recession that damaged Bush’s re-election chances in 1992.

As the Fed’s history has shown, it is not an independent organization – nor can it be. As long as its actions are directed by human begins, it will be influenced by the ideology and world view of those decision makers. If the goal is to eliminate any partisan or ideological bias in monetary policy, the best way to do it is by eliminating the Fed entirely and have money dictated by the market.

Until that happens, any claims of the Fed being an “independent” institution is simply an attempt to block transparency of the organization. As Murray Rothbard explained:

“Independent of politics” has a nice, neat ring to it, and has been a staple of proposals for bureaucratic intervention and power ever since the Progressive Era…But it is one thing to say that private, or market, activities should be free of government control, and “independent of politics” in that sense. But these are government agencies and operations we are talking about, and to say that government should be “independent of politics” conveys very different implications. For government, unlike private industry on the market, is not accountable either to stockholders or consumers. Government can only be accountable to the public and to its representatives in the legislature; and if government becomes “independent of politics” it can only mean that that sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel or to “throw the rascals out.”

When it comes to how President Donald Trump views the Fed going forward, hopefully he will trust the instincts he had during his campaign, rather than listen to his Treasury Secretary from Wall Street.


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