I know that central bank independence is held as sacred by those who back fiat money. But are their actions truly independent, or are they slaves to the Treasury, not truly independent, but unaccountable to voters and seemingly, Congress as well. I have written about this before: Central Bank Independence is Overrated. Central bank independence does not mean that Congress can’t tell them what to do, even if they ignore it. It does mean doing what is best for the nation as a whole, regardless of what the politicians say.
One reason why I think the Fed is unaccountable is the $1.2 Trillion of secret loans they made to banks during the crisis. Those loans did not appear on the H.4.1 report. If the Fed made these loans, where did it source the liabilities to fund these loans? The Fed is not magic; it still has to find ways of funding the loans that it makes. If it did not fund the loans, we have a real problem, because we can’t trust the reports that the Fed gives us. If it did fund the loans, but did not report it, we have a real problem, because we can’t trust the reports that the Fed gives us.
Are there more secrets that the Fed is hiding? I see real reasons here to audit he Fed annually. I also see reasons to take away any discretionary powers it has for bailouts. Those should come through Congress, which is accountable to voters. Congress will act quickly if there is a crisis, right? Right?! Sigh. No, maybe they won’t, but then the voters will act on them.
A truly independent central bank would have minimal interaction with politicians, and do what is best for the nation, not what is best for prolonging the life of the central bank. As it is, the current Fed, much as was under Greenspan, is just doing what the US Treasury would like. The Fed does this to preserve its independence, which really means its ability to pay its bloated, useless staff of economists in their pay. The central bank of the US could be run with less than 10% of its current staff, though we would have to collapse the regional banks, which really don’t do much. Can we collapse the FHLBs and other GSEs as well? All they do is facilitate borrowing.
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A truly independent Fed would ignore politicians, and do what is best. It would not engage in quantitative easing, but would keep the yield slope positive, while letting savers earn something. It would allow large financial firms to go bankrupt, allowing the FDIC to rescue depositors, but not lenders or owners.
But the Fed/Treasury has not done this. It has been a slave of the large money center banks, and has been their servant when it did not have to be that.
If I think of the Fed as a slave to the large banks, my model mostly works, at least until there is total failure.
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Not that I am a fan of inflation, but reducing the real value of debts, and raising the value of collateral could be useful here. Thing is, most of the Fed’s policies aren’t targeted that way. I’m not sure they can be targeted that way, aside from doing nutty things like the Fed doing QE and buying up inverted or abandoned homes, or junior bank debt. The charges of unfairness will fly, much as with any method of trying to get the price level up.
I suspect that our policy will just continue to muddle along, Japan-style, with our government absorbing as much debt as it can, while the private sector pays down debt slowly, and asset markets muddle as well. Maybe that’s a way out, though it might mean a very long time of malaise. I don’t know how well we would bear with it as a nation, and how the Fed would manage through it.
