Janet Yellen has been in front of Congress this week, answering questions about monetary policy and Federal Reserve transparency, among other things.
You could say that this is the most accountability the Federal Reserve chair is held to all year long.
Yellen, as head of the Federal Reserve, is probably the most powerful woman in the world. She is probably the most powerful person in the world when it comes to economic policy.
On Tuesday, Yellen talked about not using the word “patient” as part of the wording in an upcoming FOMC statement on monetary policy. Stocks were up on her comments. It is amazing that one person can move the financial markets based on her provided definition of the word “patient”.
This alone should tell everyone loud and clear that the Federal Reserve has way too much power. One little statement from one person should not be driving financial markets and determining the future of our economy. It reminds me of the days of Alan Greenspan when the pundits were trying to interpret every little word he said.
Yellen did not get a complete free pass, as she was questioned by members of the Senate Committee on Banking, Housing and Urban Affairs.
Senator Elizabeth Warren pressed Yellen about the conduct of the Fed’s top lawyer, Scott G. Alvarez. Despite my many disagreements with Warren, she is more principled than most politicians in Washington DC and she will speak up for what she believes in.
Perhaps one of the most interesting parts of Yellen’s testimony happened when she commented on legislation to audit the Fed. It was pushed by former Congressman Ron Paul and is now being pushed by his son, Kentucky Senator Rand Paul.
Yellen Opposes Politicizing the Fed
In talking about legislation to allow the GAO to perform an audit of the Federal Reserve, Yellen stated the following to the Senate Banking Committee:
“I want to be completely clear that I strongly oppose Audit the Fed. Audit the Fed is a bill that would politicize monetary policy and it would bring short-term political pressures to bear on the Fed.”
So there you have it. Yellen strongly opposes auditing the Fed because it would politicize monetary policy. We wouldn’t want to politicize the nation’s central bank that came into existence via the Federal Reserve Act of 1913.
We certainly wouldn’t want to politicize the one entity that has a legal monopoly on the production of money.
We wouldn’t want to politicize the entity that manipulates interest rates for a country of over 300 million people, which happens to be the largest economy in the world.
Yellen doesn’t want to politicize the institution, because we know that there were no politics involved when President Obama nominated her as Fed chair and the Senate confirmed her.
And we certainly know there is no politics involved when the Fed bails out major banks and other financial institutions.
Fed officials are doing their best to help the economy and we couldn’t possibly think that politics would be playing any kind of role in its monetary policy to finance the deficits.
What We Don’t Want
Obviously we should want far more transparency with the Fed.
The central bank controls the money supply, and money makes up at least half of almost every transaction in our economy. If we can’t have a free market, we can at least have some accountability.
If the Fed really were audited (which is unlikely to happen), there would likely be a lot of dirty laundry exposed. The American people probably wouldn’t be happy.
Of course, most won’t care, just as they don’t really care about the NSA spying on them. But a vocal minority can make a difference and put a lot of pressure on those under the spotlight.
Without trying to give any legitimacy to Yellen’s opposition to a Fed audit, it would be concerning if people started to call for a congressional takeover of the central bank. While I am all for getting rid of the central bank and letting the market determine monetary policy, I am quite fearful of the idea of Congress running the nation’s monetary policy. If that happened, we really might have to worry about hyperinflation.
If this is Janet Yellen’s concern, maybe she should state it. But I don’t think that is her concern and I don’t think she is too concerned about the possibilities of a real audit of the Fed. Even if any such thing ever made it to Obama’s desk, he would veto it.
Auditing the Fed is a modest step in regaining a little bit of liberty. It seems like a big step because the Fed has been able to get away with so much over the last 100 years.
Ultimately, our best hope doesn’t lie with legislation to audit the Fed. We should never count on politicians for anything anyway. Our best hope is to continue to educate others on central banking and how the Fed causes inflation, boom/ bust cycles, and a misallocation of resources.
We have to show people how much better their standard of living would be if monetary policy really weren’t politicized.
