Last week, I ruffled some feathers when I argued that the Federal Reserve Transparency Act is likely to create more problems than it solves for monetary policy. It seems like there’s a lot of disagreement that is based on misinterpretations or misunderstandings of what I said. So, in the interest of good faith debate, I would like to clear up some misconceptions about my case against the Federal Reserve Transparency Act.

First, let’s start off with some plain misreadings. James Caton, a teaching assistant and graduate student in economics at George Mason University states at Money, Markets, and Misperceptions that “Wheeler has chosen a poor time to defend a lack of transparency at the Fed.” However, a casual reader should notice that I stated in the first paragraph of my article, “More transparency in monetary policy and a clearer definition of the Fed’s powers are clearly needed.” I went on to say that increasing accountability and transparency is a “worthy cause.” Clearly, I am not against transparency. However, I am against the FRTA because while it provides transparency, it also gives Congress more influence over monetary policy by removing restrictions on auditing the internal communications and policy deliberations. I don’t think the transparency is worth creating a more politically motivated central bank.

Phil Magness, a historian over at the Institute for Humane Studies, made a post on Facebook, accusing me of “taking the Fed at its own word that it is “independent” and long-run oriented” while Steve Horwitz, Austrian Economist at St. Lawrence University, claimed in his own Facebook post that I am being a “tool for the powerful” for the same reasons. Here’s the rub with those claims: I never claimed that the Federal Reserve is completely independent from politics.  Although I didn’t go into detail, my article does mention the valid concerns over the current politicization of the Fed. As  explained by Goodman (1991), “Independence is a continuous, not dichotomous, variable.” I can see how my emphasis on independence might have been misunderstood as ignoring the nuances of political influences. However, that was not my intention. What I said was that the Federal Reserve was designed to be as independent as possible for a good reason, and that this legislation will only make monetary policy more directly subject to the whims of politicians.

In his Facebook post, Magness linked a lot of sources about the political influence on the Fed as if current problematic political influences on the institution justifies adding more political influence. Call me crazy, but I am not convinced. There is evidence that judicial decisions  are subject to political influence. Should we also believe this can be resolved by congressional meddling in those decisions?

Second, let’s talk about the willful misreadings and leaps of logic that have abounded in the wake of my article. It should be obvious that just because I am opposed to this particular bill does not mean I am opposed to all attempts to reform the Federal Reserve. Although I mentioned inflation targeting, I am open to the possibility of other research-supported alternatives. I don’t claim to know exactly what framework should be adopted. However, creating a research-based framework is not what  the FRTA does and is certainly not the focus of the proponents of this bill.

Instead, the proponents have focused the discussion around ending the Fed and giving monetary policy control back to Congress.  Representative Paul Broun, who introduced the FRTA, actually criticizes the fact that Congress was not allowed to vote on Federal Reserve policy actions and said “Congress needs to take that power back.” Suppose this bill passes. Are we supposed to  just trust Congress to use this increased power to improve monetary policy?

Finally, I have been criticized for using academic research published by the Fed.  However, the same people who reject the Fed’s research could be said to have an ideological bias, but that doesn’t warrant the dismissal of their research.  I see no reason why both are not equally credible. Unless the critics can demonstrate a particular issue with the methodology used in the research, I will stand by its validity. However, if the research I originally cited isn’t enough to convince you of the pitfalls of allowing more congressional influence over monetary policy, here is another academic paper that explains how greater independence helps minimize political pressures and points to the supporting body of research, such as Cukierman (1992) , Fischer (1995) , and Maloney, Pickering, and Hadri (2003). In fact, when the IGM Panel of Economic experts was surveyed regarding a similar bill, 70% disagreed with the idea that this type of audit  would improve the Fed’s legitimacy without hurting its decision making.

To come back to the critiques of my piece, Caton’s recommendation that “we implement both a good policy rule and framework for transparency” does not seem to be at odds with my position—when you read what I said properly—but, of course, that depends on the specifics of the legislation.

I appreciate his and others’ valuable input on the potential for nominal income targeting as an alternative to inflation targeting. However, I hope in the future that those who comment will abandon the personal insults which add nothing to the policy debate. As I stated in my original article, what we need are reasonable alternatives with a solid economic basis to make progress towards resolving the problems. Libertarians and other proponents of reforming the Federal Reserve shouldn’t just support any and all legislation with that aim. The piece of legislation we have is not good enough—we should aim for the best.

Note: I apologize for incorrectly stating a former university of Steve Horwitz. This article has been updated with the current information.

  • Jenkie Jones

    Ms. Wheeler, it seems as if you’re not familiar with the guiding principles which most Libertarians uphold when stating their opposition to the federal reserve. May I recommend Ron Paul’s “End the Fed” as a great introduction?

    Most Libertarian proponents of Fed transparency aren’t interested in reforming the institution; rather, we hope that the operations and machinations, once brought to light, will lead to a clearer discussion of the role that currency plays in society.

    Anyone can self-identify as a libertarian, and I will not begrudge you the label; yet for the sake of a more refined narrative, I hope you’ll allow me to clarify an important element of traditional classical liberal thought.

    Principles > Ideals

    The idealistic libertarian can (and will) espouse how things should be, often followed by what we need to do to make it happen. The principled Libertarian (which I seek to differentiate using capitalization, as befits a specific description) more often describes how things actually are, pointing to philosophical principles to explain a situation.

    So a political demagogue can point to, say, the state of our economy; they can rightly identify a wealth disparity, and state that we need to promote a higher minimum wage, that we need to lower personal debt, that we need to institute a variety of programs that help the disadvantaged get a leg up, we need more home-owners. All these sentiments are ideals. That’s no judgement on their respective values, it’s a fine thing to want the collective lot to improve. But ideals are called such because they are just that, and not the reality. The ideal of human flight could never be achieved without identifying and respecting the principles of physics.

    The demagogue can point to his/her own adherence to “freedom of speech”, and “equal rights”, etc, and then proclaim themselves civil libertarians, or the increasingly popular term “left-libertarian”.

    Yet a (principled) Libertarian – it is hoped – will recognize that freedom of speech is not simply a civil right, but rather that “equal rights”, and the right to defend one’s self, and the right to associate with who you choose are the ethical default. These rights are not awarded by human action, only curtailed. A Libertarian will see the same economic problems that the demagogue identifies and seek to explain how we got there; personal debt is up and home-ownership is down because of the joint efforts of the treasury and Fed to mandate the qualifications of home loans. We’re beginning to glimpse the same thing with school loans, and another bubble beginning to burst. Once realized, another wave a bailouts will commence – under different names, perhaps – but to the same effect; namely, the biggest institutions will be wrongly identified as engines of the economy, given ridiculous amounts of money to be spent in a proscribed manner, and will commence to buying up defaulted assets at bargain prices, and thus the wealth gap widens even more.

    None of this would be possible without an institution fulfilling the functions of the Federal Reserve. It is impossible to throw unlimited money towards corporate welfare, or even towards endless wars upon both nations and ideas, without a mechanism to surreptitiously create it. Indeed, because this money doesn’t actually exist, we are quite literally just keeping score with digital points, creating illusory value under the supposition that the real wealth will be realized in the future, when it will be properly allocated to those with the highest score.

    It is a system designed to be gamed. At best, fiat currency controlled by central banking is incredibly inefficient and irresponsible. At worst, with a world of players who don’t know the rules, it is simply unethical.

    Looking over my ramblings, I’m not sure I’ve imparted the points I set out to do, but I hope it illuminates the stance of many who would see the Fed abolished. In my opinion, the most efficient and ethical way to see that happen is not with more laws, but with less; decriminalizing competing currencies would not only lead to the Fed’s hasty demise, but would also allow individuals to position themselves in the currencies of their choice during the transition.

    I’m somewhat of an econ-nerd myself, and welcome opportunities to elaborate, and even to be proven wrong! The subject is incredibly important; perhaps of the most immediate importance to the welfare of billions of people.

    • Brittney Wheeler

      Thank you for your thoughtful comments. I have read “End the Fed,” and although I agree with many of the issues with the Federal Reserve, particularly the moral hazard and corporate welfare aspects, I disagree with the solution proposed.

      “Most Libertarian proponents of Fed transparency aren’t interested in reforming the institution; rather, we hope that the operations and machinations, once brought to light, will lead to a clearer discussion of the role that currency plays in society.”

      This is very concerning to me. I think libertarians should be interested in reforming the institution for the very reason you state, the welfare of people. Even if you accept that the U.S. would have been better off with no central bank at all, which no one knows for sure, eliminating an institution that is so ingrained in our daily lives shouldn’t be taken lightly. If the Federal Reserve Transparency Act achieved the purpose you state and public opinion was in favor of removing the institution, markets would undoubtedly be impacted and there would be uncertainty throughout the U.S. and even the world economy because the Fed is part of a complex, interconnected global system. Who would take over the functions of the Fed? What would be done with all the troubled assets on the Fed’s balance sheet? Basically, I am concerned about throwing out the baby with the bathwater.

      On the other hand, suppose the Federal Reserve Transparency Act does not achieve the goal of ending the Fed. We are left with the problems of a democratized monetary policy that I have elaborated in both of my previous articles.

      You stated, “In my opinion, the most efficient and ethical way to see that happen is not with more laws…” I agree with this in general, but when we already have a law, isn’t it better to amend that law if doing so can resolve some of the issues? That brings me to another point you made with the statement, “At worst, with a world of players who don’t know the rules, it is simply unethical…” The creation of a more clearly defined legal framework, as I have mentioned in both of my articles, would make the rules more clear to the players.

      • Jenkie Jones

        At the risk of appearing to be a crank, when has additional amendments or legal addendum ever made law more clear? Abolishing the Fed would certainly cause some turmoil, but given the nature of our problems, I can’t help but think this temporary readjustment would be a good thing in the long run.

        If we accept my oversimplified “dollar = point” analogy, those who hold actual assets will still retain the same positions, as real assets retain value thanks to demand. The actual wealth of the world will still be there, simply without the added layer of chicanery.

        Decriminalizing competing currencies would allow the paper players to re-position themselves to minimize losses in the currencies and assets of their choice, while also rendering the Fed obsolete. No abolishment necessary.

        The idea that we must entrust our economy to a secretive monopoly of monetarists, or suffer the whims of a politicized monetary policy is, however innocently, a false paradigm. As with nearly every problem of global circumstance, liberty provides far better solutions than do more laws. Letting individuals decide which currency provides them with more value will provide a whole new industry sector – one where competition creates better and better conditions. Who knows, in an effort to compete, perhaps the Fed will even get in on the act and tie the dollar to something besides the guns pointed at taxpayers….

  • max

    Brittney, it appears you have been disillusioned by mainstream economics. While it’s not wrong to focus on the politics of central banking, the existence of which you acknowledge, the real problem resides in the assumption that fallible men CAN properly target inflation, maintain price stability, and “grow” the economy by creating electronic reserves. If you read Hayek like most libertarians, this is what he called the fatal conceit – that a handful of men and women could somehow plan an entire economy. We know economics and all other social sciences are far more complicated than the mathematical models put forth in academia. Whether a congress or CB controls monetary policy is ultimately immaterial. Having a monetary “policy” (that is to say a centrally planned system) is as, if not more destructive than having a food “policy” or an automobile “policy”.

    • Brittney Wheeler

      Max,
      While I have not read Hayek’s work in depth, I have read some of it so I am familiar with this critique of economic models. In fact, I share his skepticism towards economic models because I think human action is much too complex to be explained by math. However, models can help us understand phenomena as long as we are aware of their limitations.

      See my response to Jenkie Jones for my opinion on eliminating the Fed. What is your evidence that Congress vs. a Central Bank is immaterial in monetary policy? I have cited quite a bit of evidence to the contrary, but I am open to other perspectives.

      • max

        Right, the variables in social sciences are seemingly infinite. This is why economics is not applied mathematics nor a physical science – we can never deduce every variable, and to think that we can or to think that we know enough to manage markets and allocate resources is, again, a fatal conceit and the definition of scientism. Sure, models can work that are constrained by a few easy discernable variables. It’s when you add multiple ambiguous variables, and then try to derive policy from that, that you begin to realize the flaws in mathematical economics. Since the Fed is the topic, the Taylor rule, as a function of the FF rate, “potential” output (no consistent way to measure it), GDP deflator (could use CPI or PCE), desired inflation (subjective), is a good example of the impossibility and unworkability of complex models. Above all, you have the problems of measurables vs. immeasurables. No mathematical model could truly tell you how much malinvestment is in the economy or what resources need to be reallocated. No one can know the proper structure of prices that will clear markets. The price system is the only way to realize this.
        What’s immaterial about who’s guiding MP is those in power are/would not be grounded in sound theory. If they were, there would simply be no central bank. I’ll let Hayek summarize, “The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”
        You could replace “total employment” with economic growth, and the point would be the same. Central banks falsely believe that boosting demand and investment will create sustainable growth. We have seen that manipulating consumption and investment through interest rates only creates bubbles (malinvestment) that will be (and must be) liquidated at a later point when interest rates readjust upwards.

  • AdamDickens

    Strikes end in nothing. Always