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Fed, Congress & Banking Industry - An Analysis Of Independence

John Galt

Updated: January 18, 2023

Fed independence
Editor’s Note:

EDITOR'S NOTE: In his first speech of 2023, Fed Chair Jerome Powell addressed the issue of the central bank’s independence from the political agendas and pressure from Washington. With independence comes greater transparency and, we assume, decision-making in the interest of the nation’s economy. I think it’s pretty clear that the Fed, post-Greenspan, has been rather transparent. Americans can clearly see where the central bank has erred in both its forecasts and strategies. But is the Fed truly independent from the pressures of fiscal interests? The article below claims that such a notion is an absolute myth. Not that the Fed’s subjugation to Washington’s whims comes as any surprise. Still, it's the inconvenience of having to deal with this blatantly false narrative plus all of the monetary and fiscal subterfuge that takes place beneath this thinly veiled “untruth.”

The average price of eggs increased by 49%, butter/margarine by 34% year-over-year, CNBC reported as of November. Yet, with his first speech of the year, Federal Reserve Chair Jerome Powell addressed the issue of the Fed’s independence. Yes, the conference was on Central Bank independence. But how many Americans have any concern, or the slightest care for this?

At a conference in Sweden, Powell made his case using an appeal to democracy:

With independence comes the responsibility to provide the transparency that enables effective oversight by Congress, which, in turn, supports the Fed's democratic legitimacy. 

Strange that one of the country's most opaque (and possibly most unconstitutional) organizations speaks about both transparency and democratic legitimacy; but once the propagandists commit to Orwellian leaps of the absurd, they must never deviate from the narrative.

Normally, talk about Fed independence centers around being independent from Congress. It was Congress who was tasked by the constitution to handle monetary affairs of the country; it was also Congress who essentially outsourced the task to the Fed. However, Powell somewhat deviated from script when speaking about Fed independence in relation to the banking system.

In the area of bank regulation, too, the Fed has a degree of independence, as do the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.

It’s an odd relationship. I frequently express how peculiar it is that the Fed is tasked with regulating the banking system while simultaneously paying an annual dividend to the very banks it regulates. In addition to the payout of very (normally) large profits, the Fed acts as the “lender of last resort,” creating money to buy bonds when it chooses, bails out wall street, pays interest on bank reserves held at the Fed, conducts repo/reverse repo operations, carrying out all sorts of tactics to keep the banking sector afloat.

No other industry is supported like the banking industry. The existence of the Fed allows banks to take on tremendous amounts of risk, knowing the Fed will protect the downside. In other words: privatize profits and socialize losses; one of the many reasons those who long for a free and fair society are against the Fed.

And so, in addition to lack of transparency, the Fed has an independence problem, whether from Congress or the banking sector. If there was something to agree with him yesterday, it would be that the Fed should not use its monetary powers to tackle climate change. Unfortunately, his stance on not being a “climate policymaker” is not without caveats. Powell tells us:

Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections.

… if it wasn’t clear:

But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.

Was he giving a wink to Congress?

The moment Congress gives the Fed explicit direction to fight climate change is the moment it becomes appropriate to use the Fed’s monetary firepower to fight the war on climate change. As the democratic process affords, this would be okay if the public, via the electoral process, expressed enough interest on the topic.

It all invokes an interesting conclusion which illustrates the myth of Fed independence. It’s Congress (backed by wealthy individuals) who allows the Fed to exist. The Fed can only serve as a tool to protect special interests (i.e. the same wealthy individuals); and the Fed would never end itself anymore than Congress would. It’s a messy affair! But the Fed, Congress and the current banking system are inextricably linked, and by their very nature go against the public’s interest.

 

Originally published by Robert Aro at Mises Institute

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