Peter Klein: “It’s Not Yellen That’s The Problem, But The Fed Itself” – News Investors

Posted on :Nov 06, 2013

By: Peter Klein

News Investors

November 5, 2013

President Obama has nominated Janet Yellen to chair the Federal Reserve.

The first woman up for the position, Yellen was nominated only after a  sustained media frenzy. Both Yellen and her top competitor, Larry Summers, were  routinely subjected to amateur psychoanalysis by professional political  pundits.

Summers was eventually forced to withdraw from consideration after analysts  dissected his “famously difficult personality,” condemning him as “a jerk” with  a “proclivity toward arrogance and disdain of others.”

That so much importance is placed on the Fed chief’s temperament may seem  absurd. But this indicates a much deeper problem: the Fed has too much  power.

The Federal Reserve is the most important economic planning agency in the  world. It’s charged with promoting full employment, stabilizing prices, and  overseeing the financial sector. So the new chair’s theoretical views,  management style, and personality quirks could affect trillions of dollars of  economic activity.

Is it wise to hand such extraordinary power to an elite cadre of economists  and bureaucrats?

The pretenses of top-down planning have been debunked by history. Throughout  the last century, every nation that adopted central planning had its economy  flounder.

Even at the microeconomic level, the limits of top-down planning are  increasingly obvious.

Organizations, public and private, are becoming more decentralized. Large  corporations are scaling back hierarchies to encourage bottom-up innovation.  Wikipedia has displaced Encyclopedia Britannica. The creative collaboration  behind open-source software drives technological evolution and user savings.

Why should monetary policy be any different? Why do we need a government  agency, operating largely in secret and without effective oversight, managing  the money supply, setting interest rates, and telling banks what to do?

The prices of most goods bought and sold in the U.S. are governed by the  choices of buyers and sellers on the open market. With commodity money, such as  a gold standard, the quantity and value of money, along with the interest rates  that coordinate borrowing and saving, are determined in the same way.

When a government agency controls the money supply and manipulates interest  rates — as is done today — the decisions of entrepreneurs, investors, workers  and consumers are shaped by the beliefs and values of a handful of government  planners.

Given the Fed’s remarkably poor track record, switching to a market-based  money supply would be a big improvement.

By rapidly increasing the money supply and slashing the federal funds rate,  the Fed encouraged the sustained malinvestment in capital that eventually caused  the 2008 financial crash.

 

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