With the first year of the Trump presidency wrapped up, itís time to set priorities for year two. Finishing out the year strong, President Trump put his stamp of approval on tax reform. Already paying dividends to a higher degree than anticipated, the tax cuts have given Trump some much needed credibility. Now, itís time to follow up this achievement in fiscal reform with monetary reform.
The national bank of the United States, the Federal Reserve, can often seem untouchable to the casual onlooker. The Fed and the special interests that they benefit ritualistically repress any attempts at reform right out of the gate. Retired congressman Ron Paul (R-TX) made Fed reform his top priority through his near 30 year career. Yet, even a simple audit of the bank was too much for him to achieve.
Now, however, the Trump administration provides us with a golden opportunity. Changes in actual Fed policy may not be coming in the near future. With Trump expected to nominate Jerome Powell, a figure very similar to the Chair heíd be replacing, the easy money philosophy will likely remain intact. What we can hope to achieve, however, is a step forward towards transparency and accountability.
The first step to reigning in the Fed, perhaps not tomorrow but eventually, is to expose their operations. Of course, Fed defenders like former Chairman Ben Bernanke are often quick to point out that the Fed is, indeed, audited already. In a sense, this is true. The most basic functions of the bank do face a routine review process.
What the public doesnít get to see, however, is the most important aspect of the Fed: monetary policy decisions. Last year, Trump signaled he might support the effort spearheaded by Senator Rand Paul (R-KY). While we might not see significant policy changes immediately, this measure would set the stage for such transformations.
Congress and the public deserve to see what is going on behind closed doors. With literal trillions of dollars on the line, itís fair to wonder whether the Fed should be able to operate so secretively. If we can force the Fed to show us, as well as justify, their policy deliberations, itís reasonable to expect saner policy down the road.
Bills like the Financial CHOICE Act have included measures to not only reveal these policy decisions, but to chain Fed policy to a specific monetary targeting rule. The Taylor Rule, for example, suggests targeting an interest rate at 1.5 times the inflation rate.
Itís important to note that the Fed, not Congress, would set their own rule to follow. Out of the many monetary models that exist, the bank could choose to follow whichever one they please. Why is this an improvement? Because when the Fed is not tied to a specific policy, theyíre more or less free to change course as they desire.
By forcing them to chain themselves to a rule, a new sort of transparency will arrive. If they depart, theyíll have to answer to Congress.
The Death of Independence Has Been Greatly Exaggerated
Another way to reign in the Fed, without overtly mandating a change of philosophy, is to pull the bank into the normal appropriation process. As the R Street Instituteís Senior Fellow, Alex J. Pollock, notes, ďEvery dollar of Fed expense is taxpayer money.Ē As such, it is only fair and sensible that taxpayers have some sort of control over this through their representatives.
However, as one might imagine, proposals such as these face hearty oppositon. Above all other proposals, an audit of the Fed is what sends the bankers into cardiac arrest. Donít let cries about independence fool you, itís all about power. They have it, you donít, and they want to keep it that way.
As central banks enjoy pointing out, there is reason to believe that independent central banks perform better than policitized ones. This is nice to say, but ultimately irrelevant to our discussion. First off, this isnít the same as some despot directing the bank to print money. Telling the Fed to set their own rule, and stick to it, is hardly the heavy hand of polticial influence.
Whatís worth considering, however, is whether or not the Fed is already a political organization. As many would argue, it is. Itís certainly nice for the Fedís Board of Governors to think of themselves as purely intellectual beings, ejoying their comfy roost in the ivory tower.
The reality, though, is that the Fed is composed of human beings as falliable as you or I. That is not to say theyíre incompetent in their field. Certainly, they are all certified experts in the realm of economics and monetary policy. Thatís all the more reason for them to believe that they can fix things with naught but their own ingenuity, and a press of a button.
As human beings, they will naturally face pressure to keep easy money flowing in times of economic distress. We donít have to discount the knowledge assembled at the Fed. However, we donít have to take for granted that theyíll always be right, either.