Today, members of the House Financial Services Committee may have spent two fruitless hours debating ways to reform the Fed. While most in Washington would hesitate to call that time wasted, little political currency was gained by either side. For every fix raised, there seem to be equal or greater concerns. In short, the Fed likely isn't going anywhere any time soon.
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In a hearing chaired by Republican presidential candidate and Texas Rep. Ron Paul, perhaps the Fed's chief foe, the committee's Domestic Monetary Policy and Technology subcommittee addressed a crop of Federal Reserve reform bills currently in Congress. The Sound Dollar Act, introduced by Republican Rep. Kevin Brady of Texas, was one of the most-discussed. Among other things, it seeks to reduce the Fed's dual mandate to a single mandate, by giving the Fed the authority to focus on price stability only--not fostering maximum unemployment as well, a double duty critics says is either undoable or bad for the economy. Another, from Massachusetts Democratic Rep. Barney Frank, aims to have the president appoint all Federal Reserve Bank presidents, with the Senate granting approval. Yet another, this one from Paul, aims to do away with the Federal Reserve system altogether.
Still, many of the proposed reforms look like partisan pipe dreams that are unlikely to pass.
"There's a lot of grandstanding here, in my opinion," says Paul Edelstein, director of financial economics at IHS Global Insight, who believes it "very unlikely" that any of the proposals will be successful.
It seems that for every reform argument, there is a larger wave of opposition, making passage unlikely.
Ending the dual mandate is one of the most common Fed criticisms around, and it had many proponents at today's hearing.
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"Except in the very short term, monetary policy cannot boost real output and job creation," said Brady, testifying before the committee today. Brady cited the Fed's own Open Market Committee members, who said in a press release after their January meeting that "the maximum level of employment is largely determined by nonmonetary factors." By aiming its attention at employment, Brady and other critics believe, the Fed takes its eye off the inflation ball, making for less price stability.
But a two-part mandate is just sensible policy, Alice Rivlin, a former vice chair of the Federal Reserve Board of Governors and a senior fellow at the Brookings Institution, said in her testimony. Economists have translated that mandate, she said, into a middle-of-the-road approach that "keep[s] the economy as close as possible to its long-run potential growth, without seriously overshooting in either direction."
Cutting the employment half of the mandate, she added, would also create unfounded worries. "It would imply that inflation is a serious current threat to American prosperity that seems to me unwarranted," especially among a population that is concerned about jobs, she said. This means that, aside from the fact that many Democrats are opposed to a single mandate, it may also not be a politically viable idea.
From the left, Frank takes aim at the banking industry, saying that it has outsized influence within the nation's central bank. Federal Reserve Bank presidents are chosen by their regional bank boards, a fact that Frank finds outrageous, as these presidents help set monetary policy.
"The regional federal bank presidents are picked by bankers. It is an extraordinary power that the FOMC has, and everyone agrees," he said.
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Presidential appointment may be an alternative, but it is not a solution, said Brady. In his opinion, that tack would further politicize the Federal Reserve Board and give even more power to Wall Street and Washington. Furthermore, a Republican House may not be exactly comfortable with handing this power over to a Democratic president, and a Democratic Senate might be equally unenthused about doing so for future Republican presidents.
Then from the far right, there is Paul's idea of abolishing the Fed altogether. Paul's complaints are manifold: the central bank devalues the dollar, prints money out of thin air, and facilitates government overspending, he says.
According to one expert, there is an inherent flaw in allowing an entity—not the free market—to dictate money's supply and value.
"Central banks don't fight inflation; they create it," said Peter G. Klein, an economist at the University of Missouri.
Killing a century-old institution is extremely unlikely to happen, says Edelstein. "There's broad consensus that we should have a Fed except in the most extreme right of the aisle."
Furthermore, opponents say that it would make the federal government weaker in the face of financial shocks.
"The United States before the Federal Reserve Act suffered from chronic deflation and financial panics; for this reason the period from 1873 to 1896 was known as the Great Depression, until the 1930s got that title," said James K. Galbraith, chair in government/business relations at the University of Texas-Austin's Lyndon B. Johnson School of Public Affairs, in his testimony. By that logic, killing the Fed would mean ignoring history and thus risking another depression.
It sounds scary, but no worry—neither this, nor any of the other bills, appears likely to pass anytime soon.
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.
Corrected on 05/09/12: An earlier version of this article incorrectly attributed a quote from Peter G. Klein to Grove City College economics professor Jeffrey Herbener.
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Patrick Barron of PA 7:41AM May 09, 2012
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