Hubris of the Fed

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The New York Sun

A director of the New York Federal Reserve Bank has jumped into the fray against efforts by Congress increase its oversight of the central bank it created. The director, Glenn Hutchins, asserts in an op-ed piece in the London Financial Times, that the chairman of the Fed’s governors, Janet Yellen, “is right” to have warned this week against measures that could subject policymakers “to short-term political pressure, in the name of transparency.” He insists that in the past six years “monetary policy has been the only consistently functional economic policy tool.”

Given the way the 2008 slump stretched into what is now known as the Great Recession, consuming an entire presidency that was supposed to change the world, we’re not sure that’s something to boast about. Yet he seems to be under the impression that opinion is unanimous that the Fed is the institution that saved the country and that it did so despite the Congress that created the Fed. He boasts of the fact that the Fed “implemented a series of measures, among them a huge programme to buy assets with newly created cash.”

“Fortunately, the central bank was independent of politics, which enabled it to act,” Mr. Hutchins writes. He makes no mention of the fact that the New York Fed itself was just found by a United States federal court to have broken the law in the course managing this crisis. Yet this happened just a few weeks ago in the United States Court of Federal Claims, which found that the taking by the Federal Reserve Bank of New York (of which Mr. Hutchins was not then a director) of a 79.9% equity ownership and voting control in AIG “constituted an illegal exaction under the Fifth Amendment.”

It’s not our purpose to suggest that the scandal of the Fed’s handling of the AIG crisis is the be-all-or-end-all of this debate. No damages were awarded the AIG shareholders who brought suit, and it may yet be that the Fed will be vindicated on appeal. But one would think that if the directors of the New York Fed are going to start mocking the standing of the Congress of the United States they would have the judgment to acknowledge the latest verdict in respect of their own institution. The New York Fed was found to have, with the Treasury and certain lawyers, “orchestrated” the AIG takeover in a way to exclude AIG’s shareholders.

Isn’t this a moment when it would be more logical for the directors of the New York Fed to look to the governance of their own institution? The Congress of the United States is a lens of angels compared to the Fed, whose chairman has been on the Hill declaring she would oppose any rule — even, for goodness sakes, a voluntary one that the Fed itself would establish — for monetary policy. Let Mr. Hutchens reflect on the decision of the Founders, who, in the Constitution, granted the monetary powers to the most political branch of the entire government and expected the Congress to use them.

The New York Sun

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