11 January 2016

The Fed, the goose and the gander


The prospect that the Federal Reserve will radically expand margin requirements — and not just on banks — invites reflection on the goose and the gander. The Fed’s scheme to expand margin requirements has been mooted for some time, but the news broke this week in the Wall Street Journal. It reports that the banks and other financial institutions that would be affected are still working out how they’ll respond.

It’s not my purpose here get too deeply into the margins, so to speak, of that question. It may (or may not) be logical for the Fed to start tightening the rules on everyone else. But the central bank is doing so in a season in which its brass is up on Capital Hill fighting against any effort in the Congress to impose new rules on the Federal Reserve itself. And therein lies a story that is getting far too little attention.

The measure that has so alarmed the central bank is the Fed Oversight Reform and Modernization Act. It passed the House Nov. 19 and is now before the Senate. It would do a number of things, including launch Audit the Fed. That was Ron Paul’s idea (back when he was in Congress); it would provide to the Congress that created the Fed oversight into how it makes monetary policy. It would strengthen the role of regional banks in the governance of the Fed.

It would also set up a Centennial Monetary Commission to review at the beginning of the Fed’s second century the actual performance of the Federal Reserve. And it would require the Fed to establish a monetary rule and let the Congress know what it is. The Fed could depart from its own rule. But it would at least codify the basis on which it is formulating monetary policy. The New York Sun, which I edit, has supported most, if not all, of these reforms.

The Fed is opposed to nearly all of them, carrying on in one forum after another about its independence. Yet the idea that monetary policy should be independent of the Congress would certainly have been a novel thought to the Founders of America. It was precisely to the most political branch of the government, the rabble known as the Congress, that the Constitution grants every monetary power listed in the Constitution.

These include the power to tax, to spend, to borrow money on the credit of the United States, and to coin money and regulate the value thereof — and of foreign coin — and to fix the standard of weights and measures. Yet Chairman Yellen was up on the Hill as recently as last year warning that she would oppose any rule that would hold the Fed to a formula in respect of monetary policy. She’s gotten President Obama to promise a veto.

It is no small thing that the House of Representatives has passed the FORM Act. It can be read as a significant vote of no confidence in the Fed on the part of the more representative of Congress’s two cameras. It has been building since the value of the dollar started collapsing in George W. Bush’s first term (it eventually plunged to a 1,900th of an ounce of gold from the 261s of an ounce at which it was valued on the day he was sworn in).

Whatever logic there is for the Fed imposing new rules on the privately owned economy, it strikes me that that the higher priority would be getting itself right with the Congress. The value of the dollar today is, at a 1,096th of an ounce of gold, less than a quarter of what it was on the day Bush ’43 was sworn. Despite recent gains, the dollar’s value is off more than 21 percent from where it stood at the start of President Obama’s first term.

It would be one thing if the Fed’s vast expansion of its balance sheet had prevented the crisis of 2008 from turning into the Great Recession that came to define the Obama years. But it didn’t. The eventual reduction in the jobless rate coincided with a plunge in the rate at which Americans have been seeking work. The Fed has taken on trillions in markers of its own government. It wouldn’t be surprising, the Sun has suggested in an editorial, were Congress to start asking whether the gander ought to receive the oversight that the Fed wants to give the goose.

Seth Lipsky is editor of The New York Sun.