Place Political Limits on Overly Compliant Central Banks

In theory I agree that Central Banks should be free from political influence. In practice, I don’t. Why? Central Banks regularly cave into political influence. They are quick to loosen, and slow to tighten. They are happy to let asset bubbles develop, because that is not what they are employed to handle.

The truth is, the arguments of Ben Bernanke are a joke (here too). When Central Banks felt no pressure, they happily went along with what the politicians wanted. No one wanted a strict central bank. Thus for all of the Greenspan/Bernanke era, asking to be free from political control is just a show. They want to agree with the politicians, who want easy credit. They don’t want rules that would lead to a better economy in the long run, where their political friends get harmed.

Here’s a simple rule, that if put into place, would reduce volatility considerably: if the 3-month T-bill yield is more than 2% lower than the 10-year T-note yield, tighten. If the 3-month T-bill yield is more than 1% higher than the 10-year T-note yield, loosen. When in doubt, set Fed funds rate such that the gap between the 10-year and 3-month T-bill to 0.5%. It’s that simple. We don’t need grotesque yield curve shapes to guide the economy; we do need to limit the amount of excess liquidity in loosening, lest we get asset bubbles.

This would all be easier to handle if the Fed had been clean during the boom. They were anything but clean, loosening too soon, tightening too late, and being lax in regulating underwriting. (Note: what miscreants has the Fed fired due to incompetence? If they fired no one, then the incompetence goes to the top, and the entire Board of Governors should be cashiered. And if they are not cashiered, let us move on to the politicians who hide behind the Fed and eliminate them. Perhaps we should adopt a rule of our own: if incumbent, then vote him down.)

The Federal Reserve has not shown that it is worthy of retaining the freedom that it thinks it has. Please let them show me instances where they did something bold, and received political criticism. No, they have not done so. They are slaves to the existing system, and will not speak truth to power. They cravenly demand freedom, while they love their bondage to the political establishment.

My view is this: scrap the Fed. Since we are not ready for a commodity standard as a nation, put into place a new Fed. Fire all of the economists. Let the new Fed adopt my neo-Wicksellian rules, which are a lot more flexible than Friedman’s baseless dogma, and more market-based. Here are the rules again:

• If the 3-month T-bill yield is more than 2% lower than the 10-year T-note yield, tighten Fed funds.
• If the 3-month T-bill yield is more than 1% higher than the 10-year T-note yield, loosen Fed funds.
• When in doubt, set Fed funds rate such that the gap between the 10-year and 3-month T-bill to 0.5%.

The Fed does not need a big staff to pull all of this off. They could get by with a core staff of a few hundred, and however many are needed to do bank underwriting supervision. Also, the Fed should disclaim responsibility for the economy, and simply focus on price stability. No more bailouts. If a bailout should be done, let Congress pass it, that they might be praised or judged for their wisdom once every two years.

The Fed led us into this mess. That they ask to lead us out is a rude joke. Please, let us get a totally new cast of characters at the Fed, or eliminate it and replace it with a commodity standard or a currency board. This Keynesian stuff is killing us slowly, and leading to an eventual US sovereign crisis, which will lead most of the world into a deep recession, if not a depression.

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