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The Federal Reserve System has come under fire in the last few months for extending itself into areas outside its Congressional “dual mandate” of stabilizing prices and maximizing employment. There are two areas where the Fed is being accused of overreaching.
The first area is economic equality. For example, the Federal Reserve Bank of New York website greets visitors with a message stating, “we are firm in the belief that economic equality is a critical component for social justice.” Senator Pat Toomey recently sent letters to several Regional Federal Reserve Banks criticizing this policy pursuit of economic equality as, “wholly unrelated to the Federal Reserve’s statutory mandate.”
The second area, environmental policy, has also become a more central focus. Economist Alex Salter reports that the Fed recently created two climate committees and joined a group dedicated to making the financial system more environmentally focused. And, although Chairman Jerome Powell says the Fed isn’t trying to set climate policy, a report out of Reuters alleges that the Fed has begun to pressure banks to assess climate risk.
As a result of this public shift, Salter has published an open letter with 42 distinguished co-signatories expressing concern. The letter’s author and co-signers are bothered by the Fed’s mission creep, and call for the Fed to focus on monetary policy and money, rather than activism.
The Fed’s Political Dependence
While this concern is well-placed, it’s important to note that the Fed abandoning political independence is nothing new. The Fed has a long history of breaching its political independence “norms.”
Perhaps the most famous example of this was when then-President Richard Nixon pressured Fed Chairman Arthur Burns into crafting monetary policy in a way that would help his re-election. A recorded conversation between the two has Nixon laughing about the idea of political independence:
“‘I know there’s the myth of the autonomous Fed . . .” Nixon barked a quick laugh. “…and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you.’”
However, the Fed hasn’t only been beholden to politicians—special interest groups also appear to have power over the Fed. After the 2008 financial crisis, a new wave of bank regulators was sent to deal with large financial institutions such as JPMorgan and Goldman Sachs. One regulator sent by the New York Fed, Carmen Segarra, released recorded conversations between herself, her supervisors at the New York Fed, and officials at Goldman Sachs.
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In the conversations, Segarra is urged by her supervisors at the Fed to change her report suggesting Goldman Sachs had an insufficient policy for dealing with conflicts of interest. When she refused, Segarra was fired by the Fed.
Although being urged to change her report may be the most egregious example, the common theme in the tapes is clear: the Fed regulators seem more like partners of Goldman Sachs than watchdogs.
The takeaway is clear. The Fed has a storied history of political corruption, and this shouldn’t be surprising.
Buying Fed Policy
To understand why we should expect corruption from the Fed we need to consider the lessons of Public Choice economics.
Public Choice looks at politics as an exchange. Bureaucrats, politicians, and political appointees, for example, want things like good jobs after retirement, funding for political projects, and valuable relationships with powerful people. In order to obtain these things, these political actors may be willing to craft policies to benefit special interest groups or other politicians.
Consider, for example, the Fed. One of the powers the Fed has is the ability to print new money. When a new 100 dollar bill is printed, the first person to receive the new money will be able to use it to buy real goods and services. If they buy a TV, for example, the new 100 dollar bill goes to the person who sold the TV. However, as the new dollar bill is spent more and more, the increased demand it creates leads to higher prices, everything else held constant.
So while the first people to get the new money get a good deal, it leads to higher prices for everyone else. Inflation is like a hidden tax on whoever gets new money after the prices have risen. Receiving new money first, then, is a privilege that some may be willing to pay for. If it only costs you $90 to lobby the Fed for a new 100 dollar bill, you come out $10 richer.
Printing money isn’t only beneficial for those who receive the money first, though. As the example of president Nixon highlighted, politicians focused on short-term re-election goals may be interested in giving favors, privileges, or punishments to members of the Fed in order to improve the economy before an election.
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Finally, the Fed’s regulatory role in banks is another “asset” special interests would like to purchase. The Segarra tapes show a clear example of how powerful special interest groups can use their influence to control the regulations within their industry. Economists call this “regulatory capture.”
So, although I ultimately agree with Salter’s open letter, it’s important to recognize that what’s happening isn’t very new. The Fed has long been involved in pursuing goals other than monetary stability. The only new development is the mask is dropping. The Fed is now being more transparent about its other activities.
And while I’d like to believe we can reign in the Fed and convince its members to follow rules, I’m not so sure. The Fed, as an institution, has the ability to transfer enormous amounts of wealth from some groups to others in the form of inflation and regulation. Given the enormity of these transfers, it seems unlikely that self-interested politicians will be willing to give up that power any time soon.
Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics.
This article was originally published on FEE.org. Read the original article.
New Conservative Network Seeks Crowdfunding Help
They say we have to go big or go home. We’re trying to go big and bring the patriotic truth the the nation, but we need help.
Readers may or may not realize that over the past year, we’ve been bringing more conservative news and opinion outlets under our wing. Don’t take our expansion as a sign of riches; all of the “acquisitions” have been through sweat and promises of greater things to come for all involved. As a result, we’ve been able to bring together several independent media sites under a unified vision of preventing America from succumbing to the progressive, “woke,” Neo-Marxist ideologies that are spreading like wildfire across America.
The slow and steady reopening of America is revealing there was a lot more economic hardship brought about from the Covd-19 lockdowns than most realize. While we continue to hope advertising dollars on the sites go up, it’s simply not enough to do things the right way. We are currently experiencing a gap between revenue and expenses that cannot be overcome by click-ads and MyPillow promos alone (promo code “NOQ” by the way).
To overcome our revenue gap and keep these sites running, our needs fluctuate between $3000-$7000 per month. In other words, we’re in the red and hemorrhaging.
The best way you can help us grow and continue to bring the truth to the people is by donating. We appreciate everything, whether a dollar or $10,000. Anything brings us closer to a point of stability when we can hire writers, editors, and support staff to make the America First message louder. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal as well.
As the world spirals towards radical progressivism, the need for truthful journalism has never been greater. But in these times, we need as many conservative media voices as possible. Please help keep NOQ Report and the other sites in the network going.
Thank you and God Bless,
We Often Feel Like David Taking on Giants
Today’s Goliath is the Mainstream Media Industrial Complex that brainwashes the masses.
Our mission is very straightforward: To counter the false narratives and nefarious agendas destroying America today. It isn’t easy for obvious reasons; despite incredible growth over the last year we are still a very tiny fish in a huge media pond. But we’re fighting and we will continue to do so, Lord willing, for as long as we possibly can. The battle for America’s present and future is too important for us to back down to the giants that stand in our way.
We need help. I don’t want to say “desperately,” but the need is definitely great. If you have the means, please donate through our GivingFuel page, PayPal, or our brand new GiveSendGo page. Your generosity is what keeps these sites running and allows us to get the truth to the masses. We’ve had great success in growing but we know we can do more with your assistance.
Thank you, and God Bless!