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- How to truly reform the Fed…
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Dear Reader,
Treasury Secretary Bessent has denounced the Federal Reserve’s “gain-of-function” monetary policy.
He claims the post-2008 Eccles Building provides the monetary parallel of China’s Wuhan lab.
As the Wuhan lab frankensteined lethal biological abominations… the Federal Reserve has frankensteined lethal monetary abominations.
And the latter has wrought monetary pathogens similar to the biological pathogen.
I refer here to the monetary pathogens of quantitative easing, zero interest rates, negative interest rates… and additional forays into monetary experimentation.
Moreover: Mr. Bessent maintains the Federal Reserve’s hazardous monetary experiments subject its supposed independence to risk.
Gain-of-Function Monetary Policy
The Treasury Secretary, in Friday’s Wall Street Journal:
- As we saw during the Covid pandemic, lab-created experiments can wreak havoc when they escape their confines. Once released, they can’t easily be put back. The “extraordinary” monetary-policy tools unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences.
- The Fed’s new operating model is effectively a gain-of-function monetary policy experiment. Overuse of nonstandard policies, mission creep and institutional bloat threaten the central bank’s independence.
I am with Mr. Bessent. The Federal Reserve has broken free of all prior shackling.
It runs, well and truly, amok.
Yet how does the Federal Reserve’s freedom menace the Federal Reserve’s independence?
Perverse Incentives for Fiscal Responsibility
Mr. Bessent:
- By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy. The central bank’s balance-sheet policies directly influence which sectors receive capital, intervening in what should be the domain of markets and elected officials.
- Entanglement with Treasury debt management creates the perception that monetary policy is being used to accommodate fiscal needs. Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices.
- Instead of accountability, presidents and Congress have expected intervention when their policies falter. This “only game in town” dynamic has created perverse incentives for irresponsibility…
- At the heart of independence lies credibility and political legitimacy. Both have been jeopardized by the Fed’s expansion beyond its mandate.
Once again, my head gyrates north and south, violently, in agreement.
Yet what is Mr. Bessent’s proposed solution to central bank intransigence?
The answer is reform, so-called.
You Can’t Expect Insiders to Truly “Reform”
Mr. Bessent believes the Federal Reserve must abandon the monetary laboratory… return to the grime of the monetary workshop… and consecrate itself to duller duties:
- The central bank must recommit to maintaining the confidence of the American people. To safeguard its future and the stability of the U.S. economy, the Fed must re-establish its credibility as an independent institution focused solely on its statutory mandate of maximum employment, stable prices and moderate long-term interest rates.
Just so. And I believe Mr. Bessent means the best in the world. Yet as runs the old saw:
“The master’s tools will not dismantle the master’s house.”
Mr. Bessent — as I see it — believes in the master’s tools. Thus he is incapable of dismantling the master’s house.
Under Mr. Bessent’s “reform,” we can expect the master’s house to stand.
Reforming the Whorehouse
“We need to reform the Federal Reserve.”
How many times have you heard it said? If once, then 13 million.
Mr. Bessent’s represents the 13,000,001th.
Yet as the late libertarian Frank Chodorov argued: “Most reform aspires to “clean up the whorehouse [while] keeping the business intact.”
To these reformers, Federal Reserve centrality is a fact as elemental as gravity… or the ebbing and flowing of the tides… or the imbecility of a congressman of the United States.
Is it true reform you seek? In the spirit of benevolence so characteristic of me… here I propose my own modest reform in seven simple words:
“The Federal Reserve Act is hereby repealed.”
That is, to reform the entire business off Earth’s despairing and suffering face.
No more setting, influencing or in any way bullying short-term interest rates, long-term interest rates, intermediate interest rates or any other interest rates.
Turn the credit business over to borrowers and lenders on the free market… as the prices of automobiles, computers, chewing gum, floor mops and catcher’s mitts are turned over to the free market.
Winners and Losers
Would such a system yield losers? Alas, such a system would yield losers. Yet does not the current arrangement yield its losers?
Yet there would likewise be winners. Among them would be many of today’s losers.
It is true, under my proposal the booms would not thunder nearly as loudly… or for nearly as long.
Yet nor would the busts. A general stability would prevail.
And in my telling, the stable boat is preferable to the rocking boat.
Most importantly, my proposal would wring the wild excesses from the financial system.
Thus should Treasury Secretary Bessent abandon the filing tool of reform for the reconstructive axe.
When could such a financial condition obtain?
As I have argued before:
You will have it come the third Wednesday of the 11th month following the 388th blue moon following Christ’s return to Earth.
On that high and glorious day… I shall rejoice.
Regards,
Brian Maher
for Freedom Financial News
