Politicians want independent Fed to avoid blame when economy tanks

Larry Lindsey
Commentary

Larry Lindsey

President & CEO, The Lindsey Group
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As the U.S. Federal Reserve continues to wage its war against inflation, President Joe Biden is steering clear of any commentary on the Fed’s interest rate decisions. Biden’s stance stands in stark contrast to his predecessor’s tweets from 2019 when then-President Trump publicly pressured the central bank to lower rates, prompting four former Fed chiefs to warn against such meddling. Straight Arrow New contributor Larry Lindsey explains why most politicians — including Congress and presidents — favor a more independent Fed:

A lot of talk is out there about the independence of a central bank. The central bank is, after all, the one who controls the money supply and indirectly controls inflation in the course of the economy. 

And having that be independent — politics is important. In the old days, we had something called the political business cycle, where the Fed chair — who by the way is appointed by the president — managed to have a great year, every year the president was up for reelection. 

Well, you don’t want that, you want an independent Fed. How independent can it be, though? 

After all, the Fed is created by Congress. The president appoints the members of the Fed, and administration economists — like the Chairman of the Council of Economic Advisors in the Treasury Secretary — regularly have lunch with Fed board members. 

Well, there are limits. But Congress and the president still maintain the Fed’s independence or at least as independent as it can be. Why? Why wouldn’t the president or Congress want to have more power over the Fed? 

Well, the answer comes from a story that actually dates back to the 1960s.

The Chairman of the House of Representatives Banking Committee was a man named Wright Patman, who came from rural Texas, mostly farmers. There isn’t a farmer in the world who wants high interest rates. So Wright Patman used to give these long stem-whining speeches, like only someone from Texas could, attacking the Fed. Well, one day he was up at the Fed having lunch with the Chairman at the time, William McChesney Martin. And Martin asked him about that and Patman had the great answer, “Well, if we didn’t have you to blame, what would we do?” 

So the politicians actually like to have a somewhat independent Fed because they can blame them. And in fact, President Biden just recently said, “Oh, inflation is the Fed’s responsibility,” meaning he’s not to blame. Well, right now we’re seeing a resurgence of a desire for politicians to have more control of the Fed, and more control of other central banks. 

A lot of talk is out there about the independence of a central bank. The central bank is, after all, the one who controls the money supply and indirectly controls inflation in the course of the economy. 

And having that be independent – politics is important. In the old days, we had something called the political business cycle, where the Fed chair, who by the way is appointed by the president – managed to have a great year every year the President was up for reelection. 

Well, you don’t want that, you want an independent fed. How independent can it be, though?  After all, the Fed is created by Congress. The President appoints the members of the Fed, and administration economists – like the Chairman of the Council of Economic Advisors in the Treasury Secretary – regularly have lunch with fed board members. 

Well, there are limits. But Congress and the President still maintain the Feds independence or at least as independent as it can be. Why? Why wouldn’t the President or the Congress want to have more power over the Fed? 

Well, the answer comes from a story that actually dates back to the 1960s. The chairman of the House of Representatives Banking Committee, with a man named Wright Patman, who came from rural Texas, mostly farmers. 

There isn’t a farmer in the world who wants high interest rates. So Wright Patman used to give these long stem-whining speeches, like only someone from Texas could, attacking the Fed. Well, one day he was up at the Fed having lunch with the chairman at the time, 

William McChesney Martin. And Martin asked him about that. And Patman had the great answer. “Well, if we didn’t have you to blame, what would we do?” 

So the politicians actually like to have a somewhat independent fed, because they can blame them. And in fact, President Biden just recently said, “Oh, inflation is the Feds responsibility,” meaning he’s not to blame. Well, right now we’re seeing a resurgence of a desire for politicians to have more control of the Fed, and more control of other central banks. 

One place where that became quite obvious, was in Britain, which is now choosing their next prime minister. There are two people competing for it. One is Lizz Truss and the others of Manning, Rishi sumac. 

Well, Ms trusts said that she is Prime Minister, she’s going to change Britain’s legal mandate to make it harder for the central bank – the Bank of England – to create inflation. Sunak, on the other hand, is more traditional wants to keep the Bank of England independent, but wants to have higher taxes and try and control inflation that way. 

The fact that this is now become a political issue is something we should pay attention to. There’s widespread dissatisfaction with the FOMC. 

The Fed actual actually has done a pretty poor job of timing the business cycle, it denied that there was inflation last year when it was beginning to ramp up and this year, it’s ridiculously optimistic at what is going to be growth this year. Last December, they predicted 4% growth, it now looks like growth is going to be negative for this year. 

So should we make it more political? Maybe they haven’t done a good job but we should be careful what we wish for. After all, just think about for a moment. 

The Congress of the United States controlling monetary policy. They’ve done a terrible job with fiscal policy. They can’t agree on anything. They’re not competent. And remember, they have a vested interest, as right Patman said, having someone to blame. 

So what we really have as another option, some people talk about is going on a gold standard. Well, the problem with the gold standard that periodically creates deflation, falling prices, and that tends to be destabilizing for the economy. 

So what should we do? What we need to do is reform the Fed. Right now it’s too academic. There’s little real world experience there. And there’s little real debate within the membership. We need a different culture at the Fed at different and more varied staff and a different and more varied members of the FOMC