The Myth of Fed Independence

The decibel levels of the arguments about the independence of the Federal Reserve have been growing in Washington. One camp says the Fed needs to be more accountable, another camp says an independent Fed should oversee the financial system, and yet another small group says the status quo is fine. It is obvious to most though that something must change. The current recession is the result of the bursting of an asset-bubble. The bubble was blown by easy money from the Federal Reserve. To allow the Fed more oversight of a system that it helped to destroy would be a surefire step toward another meltdown. Those arguing for Federal Reserve “independence” are denying or ignoring the fact that the Fed is already a political animal. A perfect example of the Fed altering its behavior to accommodate its masters in Washington is the new reverse-repurchase-agreement program the Fed has proposed. The program allows the Fed to suck money out of the economy without having to sell Treasury bonds. If the Fed did sell Treasury bonds, interest rates on those bonds would increase. And, because Treasury bonds are how the government borrows money, if interest rates increase, Congress can’t borrow as much, and therefore can’t spend it on bridges-to-nowhere, wars, farm subsidies, or anything else. This new program saves Ben Bernanke and the Fed from the wrath of Congress. If the Fed hadn’t already lost its independence, it would simply sell Treasury bonds when it needs to take money out of the economy, like it is supposed to do. Creating new programs to avoid the anger of Congress shows that the Fed is more focused on its own survival than on the wellbeing of the economy.