Wednesday, October 20, 2010
Would the Federal Reserve do better to drop its independence and become (once again) more accountable to elected officials? Timothy Canova takes on this question in the current issue of The American Prospect. He concludes that a period of Fed accountability during the 1940s, under Chair Marriner Eccles, resulted in far more successful and coordinated monetary policy, independent from the financial sector.
Canova writes that during this period a more accountable, more transparent, and "socially neutral" Fed worked with the Office of Price Administration to accommodate congressional spending and borrowing priorities (and not, as now, to serve the interests of the financial sector by, e.g., buying up their toxic assets). As a result, interest rates did not rise, even though federal spending and borrowing were much higher than today (as a percentage of GDP). Why? Because, argues Canova, an accountable Fed bought government securities "in any amount and at any price needed to maintain the interest-rate pegs at Treasury." The net result: A Fed monetary policy that accommodated congressional fiscal policy that effectively dug us out of the Great Depression.
Canova suggests that Fed independence in 1951 opened up space for financial industry capture, a conclusion buttressed by a report last month from Reuters titled Cozying up to Big Investors at Club Fed. According to the Reuters report, there's a fast-moving revolving door between the Fed and the financial industry and "information flow sometimes goes both ways as Fed officials let their guard down with former colleagues and other close private sector contacts."
Canova concludes his piece with this paragraph:
Few economists ever learn this period in Federal Reserve history, which has been airbrushed from most mainstream texts, including Bernanke's own economics textbook. To the extent that the Eccles period is discussed at all, it is dismissed as an anomaly--which, sadly, it was. Today's new normal is a central bank captured by private financial interests that is pursuing an elite agenda of deregulation, fiscal austerity, and bailouts and bonuses for bankers. But as our nation's own history shows at one of America's finest hours, it doesn't have to be that way.