Should the Federal Reserve's Board of Governors be elected?

[BrainGlutton]

In this thread – “Who owns the Federal Reserve” – http://boards.straightdope.com/sdmb/showthread.php?t=302135 – I floated the idea that perhaps the Fed’s Board of Governors be elected. Reeder suggested a separate thread for that, so here it is.

The Federal Reserve is the central bank of the United States. It is authorized and governed by statute but technically separate from the government. Its function is mainly to regulate the money supply. From http://en.wikipedia.org/wiki/Federal_Reserve:

Roles and responsibilities

The main tasks of the Federal Reserve are:

Supervise and Regulate banks
Implement Monetary Policy by buying and selling U.S. Treasury Bonds
Maintain a strong payments system
Feds cannot issue U.S. Treasury Bonds
Other tasks include:

Economic education
Community outreach
Economic research

<snip>

Interest rates

The Fed implements monetary policy largely by steering the federal funds rate, also called the overnight rate, using open market operations. This is the interest rate that banks charge each other for overnight loans to each other. This in turn influences the prime rate which is usually about 3 percentage points higher than the federal funds rate. This prime rate is the rate that most banks price their loans at for their best customers.

Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.)

The Fed usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Fed lowered its interest rates 13 times, from 6.25 to 1.00 percent, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. On June 25, 2003, the federal funds rate was lowered to 1.00 percent, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68 percent. Starting at the end of June, 2004, the Fed started to raise the target interest rate in response to concerns about the potential for increased inflation from a too-active economy. As of December, 2004, the rate is at 2.25 percent following a series of small increments.

At present, the Board members are nominated by the president, confirmed by the Senate, and serve for a single 14-year term. This is supposed to insulate them from political pressure in setting monetary policy. If the president had some direct input, he would always be tempted to use that power for electoral advantage – e.g., mandating a loose-money policy so the effective size of the deficit would be reduced by inflation. But that means that the politically independent Governors are essentially career bankers or other business executives, and, as a rule, will do what is best for the financial health banking industry and the biggest corporations. Is that necessarily always the best thing for the American people? Maybe we want an “overheated economy” and low unemployment rates, even at the cost of inflation. A “sound dollar” isn’t worth much to a person who isn’t earning any dollars.

Suppose the members of the Board were elected by the voters, and for brief terms? That would make public monetary policy, something most people rarely think about, an actual political issue – which it inescapably is – at regular intervals. How would that affect interest rates and the money supply? What kind of monetary policy would the people, if offered a choice, want?

[sleestak]

Well my best guess is that A) it’d scare the hell out of the finiancal markets and B)(possibly) cause wild swings in the economy.

A) The financial markets would go nuts because every X number of years you would have the presumably new boards members who might or might not follow through with whatever they promised to get elected. The markets probably would not react well to the uncertainty.

B) Since the board would be up for election it would put them in a place where they might(read probably) make decisions with the aim of getting re-elected instead of the aim of keeping the economy healthy. I see a scenrio like this: A little ahead of election time they lower the rates to stimulate the economy so they can ‘report’ to voters that they are doing a good job. After the elections they jack up rates to slow things down because they never should have lowered the rate in the first place. Heck, I know people who accuse the Fed of doing this to keep {insert politicians name here} elected all the time.

Last, I don’t think most people really know enough to make an informed choice. I know I do not know enough. Heck I could be totally full of it right now. As an example, I work for a software company. We recently got bought by another company. We had a meeting about benifits, specifically stock plans, and I knew way more than anyone else in the room. I don’t know all that much but my co-workers, developers with degrees, were asking amazingly low level questions like 'What is a mutual fund? How does it work?". It really suprised me that these highly intelligent, highly educated people knew next to nothing about investing.

Slee

[furt]

You’re not going to like this, but here are the facts.

[furt]

:smack: Missed the cite in the OP.

[Well]

@BrainGlutton

A “sound dollar” isn’t worth much to a person who isn’t earning any dollars.

Sounds like you advocate saying “fuck you” to roughly 95% of the population (and the rest of the world who depends on the stability of the US economy) who is earning dollars. true, it sucks not having money, but I wouldn’t want to devalue my brother’s life savings just because i’m too lazy to get a job.

[John_Mace]

@BrainGlutton

Suppose the members of the Board were elected by the voters, and for brief terms? That would make public monetary policy, something most people rarely think about, an actual political issue – which it inescapably is – at regular intervals. How would that affect interest rates and the money supply? What kind of monetary policy would the people, if offered a choice, want?

Terrible idea. The last thing we would want is a Federal Reserve reacting to every whim and fear of the popular press. They need to be like the SCOTUS-- removed from day-to-day vagarities, and looking to the long term. It’s bad enough that our tax policy is up for debate every year. The financial markets needs to be able to trust that monetary policy will be at least somewhat stable. The more we can remove this function form the political sphere, the better. Milton Friedman has often suggested that the Fed be replaced by a computer, and that is not a bad idea at all.

[furt]

@John Mace

Milton Friedman has often suggested that the Fed be replaced by a computer, and that is not a bad idea at all.

Who does the programming and maintenence?

I like milty, but that’s a terrible idea.

[John_Mace]

@furt

Who does the programming and maintenence?

I like milty, but that’s a terrible idea.

To a certain extent it was an exageration-- a way to keep politics completly out of the equation. But it also reflected his idea (which he has retreated from in revent years) about monetary policy being solely based on M1.

[XT]

Its a terrible idea…it harks back to the bad old days when politicians would screw with the economy for short term gain (i.e. to get re-elected). We definitely NEED a system that is above the fray of partisan politics. This board alone should show you the wisdom of the BG…and this is NOTHING like the infighting that takes place in the halls of power.

Just say no.

-XT

[BrainGlutton]

@John Mace

It’s bad enough that our tax policy is up for debate every year.

Whaddaya want, taxation without representation?

@John Mace

But it also reflected his [Friedman’s] idea (which he has retreated from in revent years) about monetary policy being solely based on M1.

M1?

[John_Mace]

@BrainGlutton

Whaddaya want, taxation without representation?

No, but I would like to see it made harder to fiddle with the tax code. Businesses and individuals shouldn’t have to deal with a slew of new tax directives every year.

M1?

Money supply.

M0: The total of all coins and paper cash in circulation.

M1: M0 + the amount in checking or demand deposit accounts.

[BrainGlutton]

@John Mace

Money supply.

So, what exactly would it mean to base monetary policy on M1, as Freidman once proposed? How does the amount of money in existence, in the form of cash or deposit accounts, translate to an interest rate?

[Neurotik]

@xtisme

Its a terrible idea…it harks back to the bad old days when politicians would screw with the economy for short term gain (i.e. to get re-elected).

Back to the bad old days when politicians screwed with the conomy for short term gain? Are you posting from the future?

[John_Mace]

Friedman, as you probably know, was a monetarist.

The result was summarized in Friedman’s historical analysis of monetary policy: Monetary History of the United States 1867-1960, which attributed inflation to excess money supply generated by a central bank. It attributes deflationary spirals to the reverse effect: failure of a central bank to support M1 during a liquidity crunch.

Friedman originally proposed a fixed monetary rule, where the money supply would be calculated by known macroeconomic and financial factors, targetting a specific level or range of inflation. There would be no leeway for the Fed, and business could anticipate all monetary policy decisions.

[Bytegeist]

@John Mace

Milton Friedman has often suggested that the Fed be replaced by a computer, and that is not a bad idea at all.

@furt

Who does the programming and maintenence?

Little Jimmy Smitherkins (age 8) of Minneapolis, who’s just written his first computer program…

while True:
    print "The prime lending rate is now", random(), "%"
    sleep(24*60*60) # 24 hours

[manhattan]

No offense, BrainGlutton, but I’m going to suggest that someone who doesn’t know what M1 is probably ought not be opining on whether the Fed’s Board of Governors should be elected or appointed. It’s kind of like opining on whether Supreme Court Justices ought to be elected or appointed without knowing what stare decisis is.

[XT]

@Neurotik

Back to the bad old days when politicians screwed with the conomy for short term gain? Are you posting from the future?

If you think its bad now you REALLY need to look back on your history. Ever heard of a little thing called the Great Depression? Or when JP Morgan had to practically bail out the US from going insolvent…by wheeling and dealing with the Europeans??? Think the economy has its ups and downs now?? Its to laugh.

‘Forgive him father, for he knows not what he says…’

-XT

[XT]

Thought you guys might be interested in what Cecil had to say about the Federal Reserve:

@Cecil Adams

Ha, you say. If this were really a democracy, the Fed would be a public agency just like the post office. Hmm, maybe you begin to see what the Fed’s inventors were up to. (Cecil realizes that strictly speaking the postal service itself is no longer a public agency. Don’t distract me.) One may make the argument that we need the Fed because we’re a democracy

**Truth is, the Fed was purposely insulated from the petty concerns of the public, including, to be blunt, whether they can afford to eat. “It’s made complex so nobody will understand it,” one insider told me. The Fed’s chief aim is the stability of the banking system and the dollar and, by extension, the U.S. economy. Were it otherwise, politicians would be tempted to manipulate federal monetary policy for their own gain. For example, an incumbent president might lower interest rates in an election year to boost the economy temporarily and improve his chances of re-election, even if it meant higher inflation down the road. **

But that’s the least of it. Cecil on occasion hears from some genius who thinks he’s come up with the solution to the national debt: print enough money to pay the whole thing off! This idea is, of course, completely nuts. If you double the amount of money in circulation without increasing the amount of underlying wealth, all you’ve done is make your currency worth half as much. Nonetheless governments all over the world (including the U.S. in pre-Fed days) have pulled stunts like this repeatedly, setting off runaway inflation and wrecking their economies. The Fed’s ingenious system of monetary controls means it can’t happen here, at least not as easily.

In short, you should be grateful. But of course you’re not, because the whole thing reeks of elitism. All I can suggest is that if you don’t like it, you visit Russia or Argentina or any number of other Fedless countries whose money was rendered worthless by hyperinflation. Granted these are extreme cases, but they illustrate what’s at stake.

I don’t mean to exaggerate the Fed’s independence. Alan Greenspan is called upon to testify before Congress periodically, and the system he heads would not long survive if it led the nation over a cliff. Nor is the Fed unique. A more or less autonomous central bank is a feature of virtually all capitalist economies. There’s a lot about such banks, just like there’s a lot about capitalism, that offends the sensitive soul. But they do have a compensating advantage, namely that most of the time they work.

Bolding and underlining mine of course. Enjoy.

-XT

[Neurotik]

@xtisme

If you think its bad now you REALLY need to look back on your history. Ever heard of a little thing called the Great Depression? Or when JP Morgan had to practically bail out the US from going insolvent…by wheeling and dealing with the Europeans??? Think the economy has its ups and downs now?? Its to laugh.

‘Forgive him father, for he knows not what he says…’

I even remember wildcat banks and the arguments over the silver standard.

The only difference nowadays is that instead of economic disaster happening within a decade or two, politicians are able to push catastrophe back several decades - look at the house of cards our economy is built on right now and the sincere efforts to take a long term solution to the issues instead of short term electoral victories (tax cuts, subsidies, mounting debt, etc.)

[Martin_Hyde]

No, I just don’t think this is a terribly good idea.

I should mention that at times the U.S. under the Fed has gone under the “natural” unemployment rate. Realistically we don’t consider it a problem if we have 5% unemployment. Five percent is more or less the natural rate (structural + frictional unemployment) and only a perfection in technology that 1) rapidly reeducates workers to be able and ready for new jobs and 2) effortlessly brings together all employers and matches them with the best employees for the job nationwide will get the unemployment rate much lower.