Janet Yellen’s astonishing letter to the Speaker of the House, Paul Ryan, is a sign that the central bank is panicking over the fact that Congress is unhappy with the job the central bank has been doing. Mrs. Yellen’s letter, sent also to the minority leader, Nancy Pelosi, is a protest against a bill known as the Fed Oversight Reform and Modernization Act, which is nearing a vote in the House and would require the Fed to choose a rules for the formation of monetary policy and let the Congress and the public know what they are.
That has got to be one of the most gentle, democratic, transparent reforms in the history of democracy. It doesn’t require the Fed to stick to its monetary rules, just develop a set of guidelines and let the Congress know what they are. Yet Mrs. Yellen suggests that this mild measure would breach the Fed’s independence from the Congress that created it. Her letter is whiny, inaccurate, and threatening all at once, evincing an “it’s my ball and you can’t play with it” attitude.
One would think the FORM Act would be a lead pipe cinch in a democracy. Mrs. Yellen’s letter is particularly shocking given that it is precisely to the Congress that the Constitution grants the monetary powers. These include the power to borrow money on the credit of the United States, to coin money and regulate the value thereof, to provide for punishment of counterfeiting, to regulate commerce, and to fix the standard of weights and measures.
Congress could, if it wanted, dismantle the Federal Reserve entirely. It could refuse to confirm its governors. It could require that dollars be redeemed in gold. If the Fed doesn’t want to establish a voluntary, non-binding monetary guideline, the Congress could turn around and legislate a binding one. The Congress hasn’t — at least not yet — done any of those things. It is merely considering a bill requiring the Fed to establish its own rules and let the rest of us know what it is doing.
This, incidentally, has already passed the House Financial Services Committee, albeit on a party line vote, the way, say, Obamacare passed the Congress. Support for more oversight of the Fed, though, is far more bipartisan than Obamacare and the reforms are relatively mild. Audit the Fed, which would give Congress an on-going look at what the Fed is doing on monetary policy and is now a part of this bill, passed the House in September 2014 by a vote of 333 to 92, with something like 109 Democrats voting for the measure.
Why is Congress itching for more oversight of the Fed? The reason is that the Fed was culpable in the crisis of 2008. And there is a growing sense that errors by the Fed itself — with quantitative easing and zero interest rates — have retarded the recovery, turning the crisis into the Great Recession. The recession became a cruel jobs drought; the unemployment rate is still above the average through the whole generation of Bretton Woods; the employment participation rate is at a decades long low.
Mrs. Yellen’s predecessor, Ben Bernanke, may have written a memoir about his own courage to act, but Congress’s admiration of Mr. Bernanke’s courage isn’t as unalloyed as Mr. Bernanke’s admiration for his own courage (a federal court found he violated the Fifth Amendment in the AIG case). Given all this — and the fact that the Federal Reserve is beginning its second century — it is only natural that Congress start stepping up, a view supported by an array of distinguished figures.
A number of them — including Secretary of State George Shultz and Stanford economist John Taylor — were quoted last week in a press release of the House Financial Services Committee as supporting the measure and denying it would compromise the Fed’s position. But the most newsworthy quote was the one from a former Fed chairman, Paul Volcker, who doesn’t support the bill but nonetheless articulates the logic of it.
“By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary policy system has not been a great success,” the committee quotes the sage as saying (he made the remark in 2014). If the Fed does not want to reform itself — which is what the Congress is asking it to do — the result will eventually be less voluntary. Or maybe the Congress will start looking at the most logical and radical reform, the gold standard. Mrs. Yellen’s letter on that should be quite something.