Preserve the Federal Reserve

One would expect that Repub­li­cans, even more so than Democ­rats, would under­stand the impor­tance of an inde­pen­dent Fed­eral Reserve. Yet the bill sup­ported by so many seeks to seri­ously under­mine its abil­ity to act with­out con­trol by Congress.

The most direct argu­ment against this move­ment is one that ought to appeal even more to a true pop­ulist move­ment than dreams of the actual elim­i­na­tion of the Fed­eral Reserve do. Open­ing the Fed’s actions to influ­ence by Con­gress neuters its abil­ity to act effec­tively and objec­tively in much the same way that mak­ing the CBO directly respon­si­ble to Con­gress would under­mine its cred­i­bil­ity and util­ity. We can look to his­tor­i­cal exam­ples of mon­e­tary pol­icy mis­man­age­ment by polit­i­cal actors to see just how bad the sit­u­a­tion can become when this power is wielded for elec­toral ben­e­fit rather than for long-​​term eco­nomic stability.

A politi­cized Fed could be the most dam­ag­ing change imag­in­able for this country’s eco­nomic sys­tem. Eco­nop­o­lit­i­cal threats now dom­i­nate the inter­na­tional order more than the clas­si­cal mil­i­tary and geopolit­i­cal ones do, a polit­i­cal Fed is the equiv­a­lent of a mutu­ally assured bank­ruptcy strat­egy in which the U.S. could deploy increas­ingly mer­can­tilist mon­e­tary poli­cies in response to Chi­nese cur­rency manipulation.

Yet that approach is doomed to fail. Mutu­ally assured bank­ruptcy would oblit­er­ate inter­na­tional trade, and it’s not a weapon that can be held in reserve. It’s a tool that is already in use by one of our largest global com­peti­tors, and to match them in that respect would be to adopt the eco­nomic equiv­a­lent of a nuclear strategy.

20 November 2009 – 2:41 pm | By Benjamin Daniels | Posted in Economics, Politics | Tagged , , , , , | Comments (167)