Wednesday, December 9, 2009

The Fed: Academics v. Populist

A group of academic economists — including several Nobel Prize winners, leaders of respected economic journals and former Fed officials — is dialing up its call for lawmakers to drop plans to subject the Federal Reserve to more scrutiny by the Government Accountability Office, an investigative arm of Congress.

In a letter to leaders on the Senate Banking Committee and House Financial Services Committee, the economists say a bill proposed by Rep. Ron Paul (R., Tex.) and Alan Grayson (D., Fla.) to let the GAO review Fed monetary policy would do “serious harm to the economy.” They warn increased congressional oversight would harm the Fed’s independence and ability to fight inflation.

Mr. Paul has built a popular movement in part on his attacks against the Fed and won large support in the House for his bill. Ben Bernanke, Fed chairman, has a growing body of academics on his side. Some 270 economists have signed the letter, including Edward Prescott, Myron Scholes, Daniel McFadden, Fynn Kydland, Roger Myerson and Robert Engel, all Nobel winners.


My thoughts: The Fed has two major goals: promote economic growth and price stability.
They have failed on both counts. The first failure is obvious as we are mired in one of the deepest and longest post WWII recessions. The second should be obvious, but unfortunately it is not. The dollar has lost roughly 95% of its value since the creation of the Fed. This is not price stability. We have been conditioned to think in nominal terms. Too many people believe that 2-3% annual is normal or desirble; it is neither. Auditing the Fed is the first step toward ultimately killing the creature from Jekyll Island.

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