Thursday, May 14, 2009

Federal Reserve and Transparency Don't Go Together

Forbes has an article titled "The Federal Reserve Needs To Be Boring Again" by Thomas F. Cooley. The purpose of the article must be to counter the growing call for transparency of the Federal Reserve, whether it is from Bloomberg, Fox News (suing Treasury), Representative Ron Paul (his bill now has 162 co-sponsors), or Senator Bernie Sanders.

"... let's focus on why it is important to have an independent central bank. The answer is quite obvious. An independent central bank can focus on monetary policies for the long term--that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy."

Obvious? Policy targeting low and stable inflation? Then why has US dollar lost 94% of its purchasing power since 1933? 76 years is a long time and the Fed has been in existence the whole period and more, but according to the professor short-term-thinking politicians are to blame.

What does he mean by "independence" anyway? "Being unaccountable"?

Commenting on the bills currently in the Congress that call for transparency, he says with unmasked sarcasm:

"Great! Obviously, monetary policy is so falling-off-a-log simple that your elected representatives can insert themselves via the demand for transparency into decisions of true complexity and subtlety. Why am I not feeling reassured?"

That's a good one. We have left the monetary policy to the "independent", competent Fed who supposedly knows the true complexity and subtlety, and look what has taken us.

Professor Cooley is basically saying "Trust us, like you trusted us for the past 90-plus years. You don't know anything but we do".

I've lost the will to summarize the article any longer. If you want to see the article for some reason, please follow the link at the top of the post. If you do, please make sure to read the comment section. Many of the comments are much more intelligent, informative, and erudite than the article itself.

According to Forbes, Professor Cooley is "the Paganelli-Bull professor of economics and Richard R. West dean of the NYU Stern School of Business, writes a weekly column for Forbes". He is also a member of the Council of Foreign Relations and serves on the Board of Thornburg Mortgage, which filed for bankruptcy on May 1. He is also responsible for bringing about MBA/MS in Mathematics in Finance degree program at NYU, to breed the next generation of "super quant" managers for the Wall Street. He is also a consultant to the Federal Reserve Banks of New York and Minneapolis.


Post a Comment