Fed is far too dangerous to be unaccountable

Published in the Financial Times.

I would replace the headline of your editorial “An independent Fed had never been more crucial” (June 16) with a different thought: “Making the Fed accountable has never been more crucial.” The Federal Reserve is the most dangerous financial institution in the world, with an immense potential for disastrous mistakes. How can anyone believe that, as the discretionary manipulator of the world’s dominant fiat currency, it should be guided solely by the debatable and changing theories of a committee of economists? How can such a committee insist that it should be an independent power? Much wiser was former Fed chairman Marriner Eccles, the leader of the restructuring of the Fed in 1935, who referred to the Fed as “an agency of Congress.”

To qualify as an independent philosopher-king you have to be possessed of superior knowledge, but it is obvious that the Fed has none. It is equally as bad at forecasting the economic and financial future as everybody else. There is no evidence that it has any kind of superior insight. It does not know what the results of its own actions will be. That, combined with its capacity for damage, means it needs to be be made accountable in a system of governmental checks and balances, which is consistent with the American constitutional order.

The Fed needs to hold regular grown-up discussions with the Congress about what it thinks it is doing, what theories it is trying to apply, how its ideas are changing and which sectors are being hurt or helped by its actions. Your editorial worries about the effects of the politics such discussions might entail, but everything about the money question is, has been, and will be, political.