In an Op-Ed in the Washington Post online today (Sunday), Ben Bernanke stepped up as a public figure and a politician to inform other public figures and politicians about the havoc the proposed legislation to reform the Fed would have on the United States’ economy. The difference between Bernanke and his audience? Apparently, none of them had even taken Econ 101.
It is basic economic fact–in a field with very little facts and very many theories–that an independent Federal Reserve that dictates monetary supply is a major reason why the Unites currency is trustworthy. It has been proven, as Bernanke said himself, that central banks that have the power to make monetary policy independently of political influence lead to lower inflation and interest rates. This is because the bank can be trusted not to simply print more money to inflate the country out of date or shift its interest rate to suit whatever party is in power. An independent Fed leaves the politics to the politicians and the economy to the economists. And so, the economy performs best.
It’s not that there’s not room for improvement in the Fed’s regulation of banks, as the crisis has clearly shown. And it’s not that there’s not room for greater transparency in the Fed, or to remove some of its responsibilities, such as creating a new agency to take over the Fed’s consumer lending issues, as Bernanke has already agreed to. But the proposals to remove the rule of the central bank regulatory powers or to audit monetary policy deliberations and actions make absolutely no economic sense. They make political sense, because people are angry and they want to see heads roll. This is exactly why the Fed needs to be sheltered from the whims of the masses and their representatives.
What I want to know is how so many people have taken seriously the economic proposals of a man who wants to return to the Gold Standard? Why don’t our politicians wake up? In the past 30 years there has been a worldwide movement towards erecting independent central banks. This movement has been accompanied by economic improvement, most notable inflation stability. Creating independent central banks was one of the main ways that Latin American countries curbed the hyperinflation that tortured them for so many years, for instance. Are we really going to take a step backwards? We could add tying the Fed to political whims to the list of uniquely American disgraces, such as not signing the Kyoto Protocol or the UN Convention on the Rights of the charter.
The CEO Game.