Last week, a bunch of "big name" economists signed a petition in support of Federal Reserve "independence." Never one to pull any punches, Robert Higgs says of our esteemed economists petition, "[it] reflects the astonishing political naïvité and historical myopia that now characterize the top echelon of the mainstream economics profession."
These pro-Fed economists gave three arguments in support of their position. The following includes their arguments and Higgs reply, from "Economists’ Pro-Fed Petition Discredits Its Signers."
Central bank independence has been shown to be essential for controlling inflation.
A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power ... Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.
Lender of last resort decisions should not be politicized.
“Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?
The democratic legitimacy of the Federal Reserve System is well established by its legal mandate ... communication with the public and testimony before Congress ensure Fed accountability.
But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?”
Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can ...
In yet more Federal Reserve news ... Thomas DiLorenzo says the 2008 Annual Report of the Federal Reserve Bank of Minneapolis, is "Mainstream Macroeconomic Gobbledygook!"
... The title of the report is "The Current Economic Crisis: What Should We Learn from the Great Depressions of the 20th Century?" After reading the report, it is clear to me that either the Fed has learned almost nothing about 20th-century depressions or it is lying through its teeth in order to shift the blame for causing the current depression (or both).
Relying heavily on another Minneapolis Fed publication, the article in the Annual Report ... asserts that "bad government policies are responsible for causing great depressions." So far, so good. But then the next sentence informs us that "while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression."
This is Mainstream Macroeconomic Gobbledygook: downturns in the economy are caused by random "shocks," sort of like economic lightning bolts from the sky. The kinds of "shocks" that these authors mention include declining commodity and housing prices, increases in "world interest rates," and, in the case of Finland, "collapse in trade with the former Soviet Union." No mention at all is made of central-bank monetary policy as possibly introducing economic instability. In light of all the criticism the Fed has received for being the cause of the current crisis, it is intellectually bankrupt for these authors to not address this issue in even a single sentence.
Having ignored the role of central banks in generating boom-and-bust cycles, the "lesson" the Minneapolis Fed economists claim to have learned from their study of past depressions is that the "cure" is even more central bank inflation.
Having totally absolved the Fed of all responsibility in creating the housing boom and bust, the Minneapolis Fed claims [it] needs to be more heavily regulated by — you guessed it — the Fed. It is the public that is ignorant of the causes of "systemic risk," they say, when in reality it is Fed bureaucrats like the authors of this report who are the truly ignorant ones. Either that, or they are lying to protect their jobs.
Fed economists — like mainstream macroeconomics in general — are intellectually bankrupt and clueless at best or dishonest propagandists at worst.