Or is it time to enforce it?
The Federal Reserve System was established in 1913 with the explicit responsibility of maintaining an elastic currency. All nationally chartered banks were required to become members of the System, in which they held non-transferable stock. They were further required to maintain a certain level of non-interest bearing reserves. Members of the system had access to funds at rates established by the Fed’s board.
As amended by the Federal Reserve Reform Act of 1977 the Fed was further chartered with promoting maximum employment and stable prices.
The Fed has never been chartered with “running the economy” and, indeed, I would argue that such a task is beyond any bureaucracy’s ability. BTW, the existence of the Fed opens constitutional questions. Does the Congress have the power to delegate its powers over the economy to another body?
In the Wall Street Journal op-ed this morning Amar Bhidé argues that the Fed should be broken up into pieces. I’d be satisfied if the Fed’s charter were simply enforced but I’m open to arguments that it should be given greater powers (that’s the path we seem to be on), dismembered, or abolished.
Waddaya think?
Disclaimer: the Federal Reserve is an old client of mine.
It’s pretty clear that the Fed has shown an ability to reign in inflation — as Volcker did to help end the stagflation in the 1970’s. What’s less clear to me is how the Fed can both maintain a reasonable rate of inflation AND help provide maximum employment. My old Econ 101 book said that we state a short-term choice between inflation and unemployment — so asking the Fed to do both is making it a servant of 2 masters. I’m not sure, then, how adding drastically to the Fed’s responsibility makes their job any easier, or could make them more effective in the long run.
Why don’t we let the Fed be responsible for managing inflation (as the ECB is in Europe, without the ‘maximum employment’ mandate) and let the Congress deal with regulation (that’s their job, anyways), and let the market (and industry, perhaps with incentives from Congress) take care of employment?
I agree with TimH, the fed should be concerned solely with inflation. Independent regulatory agencies should be used very sparingly in a democracy, but I believe that democracies can’t be trusted with the money supply, they’ll juice it for short-term gain. Everything else is a cost/ benefit analysis for the politicians.