Fed Transparency and Other Illusions

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.

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.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.Live broadcasts on-line of the meetings of the FOMC, with the edited transcripts on-line within 24 hours.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.”


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.

November19, 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.

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