Fed Transparency and Other Illusions

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On November
14, Ben Bernanke delivered a speech to the Cato Institute’s 25th
annual monetary conference. Cato is a well-known Washington Beltway
free market think tank.

I find it fascinating
that Cato invited the Chairman of the Board of Governors of the
organization that is by far the most powerful government-created
monopoly on earth — the antithesis of the free market — to deliver
the keynote address. I suppose it is good to hear what your mortal
enemy has to say, but to provide a forum for him to say it is, in
my view, bizarre. It is as if a 1962 anti-Communist rally invited
Nikita Khrushchev to deliver the keynote address. It gets headlines,
but at a high cost. It sends a message: "We have at long last
entered the mainstream. We are now part of the loyal opposition."

When it comes
to the Federal Reserve System, I am a card-carrying member of the
disloyal opposition.

Bernanke began
his lecture with a quotation from a 1923 FED document.

The more
fully the public understands what the function of the Federal
Reserve System is, and on what grounds its policies and actions
are based, the simpler and easier will be the problems of credit
administration in the U.S. (Federal Reserve Board, Annual Report,
1923, p. 95.)

This is the
equivalent of saying, "I’m from the government, and I’m here
to help you . . . and it won’t cost you a penny."

Here is a privately
owned organization that has been granted a monopoly by the U.S.
government over the nation’s money supply, but we are expected to
believe that it wants the public to understand its operations.

The 1910 meeting
which drew up the plans for the FED was held in secret on a Georgia
sea coast island at a social club whose members included banker
J. Pierpont Morgan and William Rockefeller, brother of John D.,
Sr., at which every participant used only his first name, just in
case he was ever placed under oath by a government investigatory
agency. But it wants greater transparency.

Here is a central
bank whose organizers refused to use the word "bank" in
its title because millions of voters opposed the idea of a central
bank, an opinion that was articulated by Andrew Jackson in 1832
when he vetoed a bill to re-charter the Second Bank of the United
States. But it wants greater transparency.

Here is a licensed
monopoly that received its charter in the last hour of Congress
on the final day before the Christmas recess in 1913, where a quorum
was barely present in the Senate, a bill which President Wilson
signed into law before the day was over — the ultimate fast track.
But it wants greater transparency.

Quoting mid-1950’s
comedian George Gobel, "Suuuuuuure it does."

If it wanted
transparency, why didn’t it provide this, beginning no later than
1923?

Bernanke then
explained.

Montagu Norman,
the Governor of the Bank of England from 1921 to 1944, reputedly
took as his personal motto, "Never explain, never excuse."
Norman’s aphorism exemplified how he and many of his contemporaries
viewed the making of monetary policy — as an arcane and esoteric
art, best practiced out of public view.

Montagu Norman
worked closely with the never-criticized, much-revered hero of college
economics textbooks, Benjamin Strong, who was the President of the
New York FED. He persuaded Strong in 1926 to expand the monetary
base, so that there would not be an outflow of gold from the Bank
of England. This policy created the stock market boom that collapsed
the year after Strong died. This was the origin of the Great Depression,
as Murray Rothbard showed as far back as 1963 in his book, America’s
Great Depression
.

Bernanke then
uses a standard technique with debaters: he creates a false distinction.
In this case, the distinction is between then and now.

Many central
bankers of Norman’s time (and, indeed, well into the postwar period)
believed that a certain mystique attached to their activities
and that allowing the public a glimpse of the inner workings would
only usurp the prerogatives of insiders and reduce, if not grievously
damage, the effectiveness of policy.

Norman’s
perspective on central banking now seems decidedly quaint. Over
the past few decades, central banks around the world have worked
assiduously to become more open about their activities. In fact,
Norman’s own institution, the Bank of England, has in recent years
been a leading exponent of increased transparency in central banking.

Here is a verbal
picture of central bankers, fighting against enormous odds in order
to show the public exactly what they are up to, when, and why. You
know, the way Alan Greenspan clarified things verbally for Congress,
1987—2006.

Monetary
policy makers have adopted a range of methods to improve their
communication with the public, including timely announcements
of policy actions, expanded testimony before members of the legislature,
the release of minutes of policy meetings, frequent public speeches,
and the regular publication of reports about the economy and monetary
policy.

The FED delays
the publication of the minutes of the Federal Open Market Committee
for three weeks. In 1967, the FOMC delayed for 90 days. This was
speeded up in 1975 to 45 days. In 2004, it was cut to three weeks.
The official history of this increase in transparency is
published here
.

In contrast,
Congress gets its minutes printed and in every member’s mail box
the next day.

When an organization
in charge of the nation’s money supply takes three weeks to do what
Congress does in one day, it surely does have a transparency problem.

For a taste
of the new, improved leadership of the Board of Governors, read
this bit of self-puffery.

This increased
openness is a welcome development for several reasons. Most importantly,
monetary policy makers are public servants whose decisions affect
the life of every citizen; consequently, in a democratic society,
they have a responsibility to give the people and their elected
representatives a full and compelling rationale for the decisions
they make. Good communications are a prerequisite if central banks
are to maintain the democratic legitimacy and independence that
are essential to sound monetary policy making.

I read this
and wonder: "How could anyone with an IQ above 90 say this
in a room full of right-wing economists at Cato Institute?"
I also wonder: "Why wasn’t the room immediately filled with
catcalls, howls of derision, and raspberries?" The universal
put-down by the opposition party in the House of Commons was called
for: "Rubbish!"

This is what
passes for "a serious exchange of ideas" inside the Washington
Beltway.

Bernanke continued.

In addition,
a considerable amount of evidence indicates that central bank
transparency increases the effectiveness of monetary policy and
enhances economic and financial performance in several ways.

All right,
Dr. Bernanke. Here is my contribution to the discussion. I offer
these steps in transparency, which are nothing compared with SEC
requirements for every publicly traded company.

  1. An annual
    audit of the Federal Reserve System by a joint team of accountants,
    representing the six major accounting firms, plus bipartisan accountants
    from the Congressional Budget Office, plus accountants from the
    General Accounting Office.
  2. An annual
    audit of the gold held by the FED as a legal reserve for the currency
    and commercial bank accounts in the United States, which the FED
    holds and administers as the fiduciary agent of the U.S. government.
  3. Live broadcasts
    on-line of the meetings of the FOMC, with the edited transcripts
    on-line within 24 hours.
  4. An annual
    list of the owners of Federal Reserve shares: who, how many shares
    per holder, the shares’ book value, and price per share on December
    31 of the audited year.

How’s that
for a start? Reasonable? Is there anything unreasonable here?

Bernanke did
not mention any of these. Instead, he bloviated.

The benefits
of an open and accountable policymaking process have spurred the
Federal Reserve, along with other major central banks, to take
a number of actions over the years to increase its transparency.
Appropriately, given the unique position of the Federal Reserve
and the sensitivity of financial markets to its communications,
these steps have generally been incremental in nature; but, taken
together, they have substantially increased the ability of the
American public to understand and to anticipate monetary policy
decisions.

He insists,
"these steps have generally been incremental in nature."
I regard them as far more excremental than incremental.

In testimony
to the Congress at the time of my nomination as Chairman, in 2005,
I pledged to continue the trend toward greater openness sustained
under Chairman Greenspan.

If you are
reading this on-line at your place of business, please do your best
to control your laughter. Your supervisor may come over to see how
you are spending your time.

In so doing,
I stressed the importance of continuity with the policies and
strategies that have served the American economy well.

Consider the
timing of this speech. The speaker represents a government-created
monopoly whose policies have created a gigantic real estate bubble,
which is now unraveling. The fall-out so far this month has led
to the firing of the head of Merrill Lynch, the nation’s largest
brokerage firm, and Citigroup, the nation’s largest bank.

As indicated
in a statement issued by the FOMC today, these discussions have
led to a decision to increase the frequency and expand the content
of the publicly released economic projections that are made by
Federal Reserve Board members and Reserve Bank presidents. As
I mentioned, the Federal Reserve has published economic projections
for almost thirty years, and, indeed, the Federal Reserve was
the first major central bank to release such projections.

I suggest that
some energetic young Ph.D. at Cato be assigned the job of doing
a detailed study of these forecasts, concentrating on forecasts
published in 1979, 1980, 1981, 1989, 1990, and 2000. We can then
get some idea of (1) the accuracy of these forecasts and (2) the
degree of independence maintained by Cato.

Bernanke
assured Cato
that there will be more frequent forecasts. That’s
all right with me. But what I want to see is a list of specific
policies that the FOMC has adopted to deal with the negative side
of these forecasts. Then we can monitor what the FOMC does. Quoting
Attorney General John Mitchell: "Watch
what we do, not what we say."

We will also
publish a comparison with the previous set of quarterly projections;
a chart showing central tendencies and ranges for each variable;
and charts showing the distribution of participants’ projections
and how that distribution has changed since the previous release.

In short, "we
will muddy the waters by telling you what individuals thought."
What matters is what the FOMC as a voting unit plans to do to deal
with these projections. This is a tried and true strategy of bureaucracies:
to bury the readers with useless data in order to conceal what is
actually being done and why.

The changes
to the projections process announced today preserve the important
role played by this diversity of perspectives. As I have noted,
Committee participants will continue to produce individual projections
that reflect their judgments about the state of the economy and
their approaches to policy.

He ended with
this affirmation: "The communications strategy of the Federal
Reserve is a work in progress." Translation: "This
organization has been shrouded in secrecy ever since 1914, and if
it had ever been serious about transparency, its communications
strategy would long since have been a work completed."

But the changes
are also evolutionary, in that they build on long-established
practices; in that respect, they represent just one more step
on the road toward greater transparency at the Federal Reserve.

Translation:
"Expect business as usual."

CONCLUSION

The more things
change, the more they stay the same. The song and dance, shuck and
jive, bait and switch operation known as the Federal Reserve System
rolls on, undeterred by Congress or any other government control
agency. The whole thing rests on a sham. Bernanke referred to it.
"As I have emphasized today, the Federal Reserve is legally
accountable to the Congress. . . ."

I
quote Forrest Gump’s mother: "Accountability is as accountability
does."

When it comes
to accountability, the FED is ahead of the Cosa Nostra but behind
Congress — way, way behind Congress.

November
19, 2007

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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