Kohn Touts Fed Freedom

The monetary system of the United States is controlled by the Federal Reserve, which is a private bank whose shareholders are unknown, whose profits are unknown, and whose policies are only deciphered through Congressional hearings – during which representatives of the Federal Reserve speak in FedSpeak, and run intellectual rings around most of the Congressmen, most of whom do not grasp the basic concepts of central banking and monetary policy.

One Congressmen they cannot run rings around, and who they instead choose to cast as outside of the mainstream of economic thought, is Ron Paul, who is the ranking Republican member of the House Financial Services subcommittee. Representative Paul (who rightly favors abolishing the Fed) has managed to tap into latent anti-Fed sentiment to such an extent that a majority of the members of the House of Representatives are cosponsoring his bill to “Audit the Fed”. You know, to figure out who these guys are and just what is going on over there.

Congress, sensing that a little bit of power might be up for grabs, now has several plans percolating throughout its halls to get a piece of the action. If the problem is, as they are hearing from their constituents, that the Federal Reserve is too powerful and has no oversight, maybe the solution is to … say… have the Senate confirm regional Presidents of the Fed, just like they do for cabinet members. Or just about anything to reign in the Fed, which operates with almost no input from the elected branches. Today, Vice President of the Fed Donald Kohn fired back during Congressional testimony:

“History provides numerous examples of non-independent central banks being forced to finance large government budget deficits,” Kohn said.

Bloomberg

It’s hard to disagree with his point. Since the Fed is so thoroughly independent from the federal government, it is immune to short term political pressures and can afford to – theoretically – follow a path that is best for the country in the long term. And in truth, this is the one thing that the Federal Reserve does well: they really don’t care what politicians are elected, or what anyone thinks – they are going to do whatever they want to do.

Of course, this doesn’t justify the existence of the Federal Reserve, for which there is no true justification because we would first have to justify a fractional reserve monetary system – which is so insanely stupid to begin with that it is best left unexamined when possible. It just means that, as far as central banks go, we are allowing a private company to make unspecified billions of dollars off of us and control our economic destiny, for no apparent reason other than that we at least won’t have the government in charge of things. And hey, maybe that’s a fair trade, but we should acknowledge that a large part of our economic milieu is completely out of the control of the representatives we elect. But Kohn continues:

Such legislation is “contrary to the public interest” because investors may see it as “undermining monetary independence,” Kohn said. “Such an action would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.”

Bloomberg

Here, we have to parse Kohn’s words very carefully. He knows that there is so much anger at the Federal Reserve that a majority of the House of Representatives are co-sponsors of Ron Paul’s “Audit the Fed” legislation. However, he states that if people get their way, it will be contrary to the interest of the people. Now that’s, one supposes, a possibility – but not one commonly made in public. And for good reason, it sounds a little bit like, “People are too stupid to know what to do, they’re just going to make everything worse by trying to fix it.”

Now, personally, I have little doubt that if the public actually realized a few more truths lurking within the financial system, that it could indeed damage economic stability. In fact, it could lead to economic chaos – but we seem to be headed there anyway, and we can at least imagine that it’s important for the citizens of a country to be aware of how their country is run – warts and all.

More than damaging long term economic stability, Kohn knows it would damage the whole idea of the Federal Reserve, which could either lead towards more or less economic stability in the future, depending on whether the functions of the central bank were subsumed into the engorged federal apparatus, or if a freer, natural, system replaced it.

Don’t hold your breath.