Policy: Economy

Federal Reserve chairman is Washington's most powerful official

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Congress,Diana Furchtgott Roth,Columnists,Barack Obama,Economy,Federal Reserve,Analysis,Budgets and Deficits,Janet Yellen,Larry Summers

Now that Harvard professor Larry Summers has taken himself out of the running for chairman of the Federal Reserve, all eyes are on Fed Vice Chairman Janet Yellen, the current favorite.

With her appointment, President Obama could congratulate himself on appointing the first female Fed chairwoman.

For much of 2013, national and international news outlets have followed the selection of a new Fed chairman with bated breath. To judge from the media coverage, the fate of billions of people, and their hundreds of trillions of dollars of assets, must lie in the balance.

Here are three reasons why selecting a new Fed chairman has generated such interest. None are good news for the economy.

Massive debt finance has become the norm. The days of a disciplined federal government are distant memories. Today, the government boasts uncontrolled spending and revenue gimmicks, and lurches from fiscal crisis to fiscal crisis.

That leaves the Fed with too much power, holding the ball.

The Fed of the 1950s and 1960s did not need to invent new ways to finance the federal government. Then, the Fed was the third-string quarterback on a winning team. That is to say, it held the clipboard on the sideline, keeping track of statistics and cheering the on-the-field successes of the team.

The Fed rushes in where the federal government cannot tread. The Fed has a plan to at least give the appearance of normalcy: a little quantitative easing here, some massive purchases of Treasury paper there.

The Fed looks fantastic not because it has magical powers, but because the president and Congress seem completely unwilling to take responsibility for budgetary matters.

It would be wrong to infer that the Fed is suited to its heroic role. Our constitution, our history and even our common sense tell us that Congress and the president should sort out the federal budget. They are elected and answerable to the public, and the Fed is not.

The Fed and its chairman are unaccountable. Most government agencies complain that another branch or office of government stops them from doing what they would really like to do.

Call it gridlock, call it checks and balances, call it what you like — our federal government is well-designed to block extraordinary gyrations and dramatic changes in policy.

Not so the Fed. With little more than a wink and a nod, the Fed and its chairman can purchase practically all the paper it wants, currently $85 billion a month, in Treasurys and mortgage-backed securities. No small feat.

Who within government could block the Fed from making these purchases or pursuing almost any other action? No one, it turns out. The Fed is an agency that has largely escaped oversight.

It operates without check, without balance. It appears to work when the other branches of government fail, but it offends our sense of constitutional democracy.

The Fed’s loose monetary policy — quantitative easing, purchases of bonds — has resulted in record-low interest rates, so investors are taking risks to get higher yields.

Low interest rates discourage savings and encourage people to take high risks, as well as dampening bank lending. This has not led to a healthy economy.

For much of its first 200 years, the United States paid most of its bills the old-fashioned way: It raised revenues to cover them.

In the 21st century, neither the president nor Congress seems to assert responsibility for the federal budget. We bounce from one continuing resolution to another, hoping that someone else will solve our budget problems. That someone else turns out to be the Fed.

Diana Furchtgott-Roth, a Washington Examiner columnist and former chief economist at the Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research. She can be reached at dfr@manhattan-institute.org.
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