The Dwindling Fed
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
The Federal Reserve, for the first time in its 100-year history, is on the verge of operating with just three governors, the New York Times is reporting this morning. It says that the “dwindling of its board” is “straining the Fed’s ability to manage its complex responsibilities.” That’s the good news. The bad news is that it’s not yet clear whether Congress will rise to the occasion and — oh, say — audit the Fed to see what is going on there. This is a crisis that Senator Rand Paul, for one, wants to avoid wasting.
What precipitated the Times story is the pending departure of Governor Stein, who chairs two committees at the Fed. “He is also the only remaining member of those committees,” the Times’ Binyamin Appelbaum notes dryly. He also notes that three nominees to the Fed board are awaiting Senate confirmation but adds that “so are scores of other nominees to other offices.” He quotes Senate Democrats as saying there is a “real chance” that “no vote will be held before Mr. Stein departs at the end of this month.”
This crisis highlights the wisdom of those who want expand the representation on the Fed’s Open Market Committee of the presidents of the regional Federal Reserve banks. This has been one of the measures being advanced by Congressman Kevin Brady, the chairman of the Joint Economic Committee of the Congress and the leader of an effort to conduct a centennial review of the Fed. As it is, the Fed governors are joined on the Open Market Committee by the presidents of five of the 12 regional banks.
The March and April meetings of the Open Market Committee, the Times reports, “represented just the third and fourth times in history that a majority of the votes were cast by the regional presidents.” Their five seats rotate among the regional banks. They are neither nominated by the President nor subject to Senate confirmation. The members of Open Market Committee who come from the board of governors are presidential appointees, who are to subject to Senate confirmation.
One of the reasons this is a hot issue is that the members of the Open Market Committee from the regional banks are often, though not always, more conservative and business-minded than the appointed governors. The Times characterizes the Fed’s “predicament” as “particularly striking because there is no real opposition” to two nominees to the Fed board, Stanley Fischer, a former head of the Bank of Israel, and Lael Brainard, a former Treasury official. Confirmation to a new term is being awaited by an existing governor, Jerome H. Powell.
Enter the junior senator of Kentucky, Dr. Paul. He is warning the majority leader in the upper chamber, Harry Reid, that he will do his best to delay those votes unless the Democrats allow a vote on his Federal Reserve Transparency Act. The measure would redeem the campaign of Senator Paul’s father, Congressman Ron Paul, to audit the Fed. The Sun was the first newspaper to endorse the measure, a version of which was passed by the House in 2012 by an overwhelming bi-partisan margin.
The Federal Reserve fears this audit. It fears the private businesses. It fears the Congress that is its creator. It claims that an audit of the kind the House wants would interfere with its “independence.” What independence? The staff of the Sun dissolved the entire text of the United States Constitution in a chemical solvent and then put the solution through a Hamilton-brand high-speed, rotary separator. Yet we were unable to detect even a particle of a requirement that monetary policy be independent of the Congress of the United States.
On the contrary, Congress is granted the power to coin money and regulate its value, to borrow money on the credit of the United States, and to lay and collect taxes. So we have long felt it past time for Congress to pull rank on the Fed. It is overdue for a top to bottom audit. The Times points out that “depletion of the Fed’s board” is “a relatively new phenomenon.” It notes that President Franklin Roosevelt put up six nominees on a Monday in January 1936 and all six were confirmed by the following Thursday.
Of course, no sooner did the Senate succumb to the bum’s rush and confirm FDR’s six nominees than America plunged into the “depression within the depression,” the collapse of 1937. Let it be a lesson to the current Congress. There is no need to rush to fill the board of the Fed. Better for Congress to look to the substance and see what share of the blame the Fed itself deserves for the Great Recession that destroyed the presidency of Barack Obama, stranded millions without work, and forced us into retreat overseas.