What is missing at the FOMC? Leadership!

An e-mail exchange with a friend gave rise to this comment. I post it with his blessing and although I had permission to “add and embellish”, the original comment is to the point:

“Related to your comments about Bernanke, he did one (other?) thing to harm the Fed’s operation: Giving Fed Bank presidents the latitude to offer their opinions not only on how an economy functions but on the likely course of future policy actions. This behavior is terribly irresponsible and neither Volcker or Burns would have tolerated it for one minute.  During their tenures, the Fed acted in a manner similar to that of the Bank of Canada:  The policy committee met behind closed doors to debate the course of policy but, once that course was determined, only one person — the Governor — communicated those decisions and the reasoning behind them.  In recent years, however, several Reserve Bank presidents (Bullard and Plosser come to mind) have spoken as if they were the Chairman; this is even more ludicrous when it is remembered that these presidents get to vote on FOMC decisions only once every three years.  And, if “forward guidance” means anything, multiple voices articulating strong, but mutually exclusive, points of view can only add uncertainty rather than reduce it.  That academic papers often rest on the effects of “forward guidance” at the same time this kind of behavior is observed every day speaks volumes to the detachment of modern economics from the real world.

The most recent example of this nonsense is here. If I didn’t wish to be black-balled from the profession and lose all ability to produce papers for professional journals, I would write about how this behavior undermines the Fed’s ability to function (imagine a low-level member of the Defense Dept. telling the press that the US should/should not begin a war against X;  I think the Chairman of the Joint Chiefs of Staff — not to mention the President — would respond strongly to this kind of insolence.  In the Fed, however, nothing is done to quash this type of behavior; there is a difference between honest dissent and the presentation of scholarly work to articulate a point of view on one hand and speech that does nothing but usurp the Chairman’s power and compromise the institution’s ability to operate).  While Bernanke tried to “lead” by treating the FOMC as if it were the chairman of an academic dept. where all voices carried equal weight, his naiveté was remarkable. One of the first roles of the Chairman is to make it clear that HE is in charge and if people wish to act otherwise, wrath would be directed toward the renegades.”

Will Yellen be any different? Unlikely.


3 thoughts on “What is missing at the FOMC? Leadership!

  1. The Chairman is not *in charge*; he (she) simply has one vote on the FOMC. Leadership would have to be by force of personality (lacking in Bernanke and, apparently, also in Yellen). But the monetary system should not be dependent on the Fed Chair’s personality; we need instead a simple monetary rule, which a bureaucrat can follow.

    • Philo, if the title “Chairman” doesn´t put him in “charge”, what´s the point? Why the sort of behavior described didn´t happen before? Because someone was “in charge”. Every organization, to function, has to have a leader, so care has to be exercised when choosing one.

  2. Not to mention the sweat-drenched hysterics of inflation-phobe Richard “Inspector Clouseau” Fisher, the Dallas Fed President and rotating FOMC board member. Anyone attending one of Fisher’s florid proclamation-fests would assume Zimbabwe-USA is upon us tomorrow.

    Fisher has informed audiences that all QE after 2009 was a mistake and that all distressed assets in the USA today are wildly overpriced!

    Yet, I have reservations about closed-door meetings and muzzled FOMC members. Democratic operations of public institutions is always paramount.

    The solution? I contend it is to move the Fed into the Treasury Department, as the Reaganauts wanted. The President of the United States simply appoints the Fed Chief (no FOMC board needed), and the pair are responsible for monetary policy. Voters know what to do if they feel monetary policy is good or bad.

    This does not absolve the Fed of the need to clearly delineate intended Fed policies.

    Like Philo, I might prefer a rules-based approach, in my case based on Market Monetarist principles. And I would err on the side of growth, not fighting inflation. When the supply side is global, how do you get inflation?

    The FOMC board, evidently creation of Rube Goldberg in days of dementia, has lost its purpose anyway. It was intended that regional bank presidents inform the Fed Chief of what is happening in their neck of the woods, and balance rural interests against urban, Western against Eastern etc.

    Today, the FOMC has become a refuge for unbalanced ideologues and mutterers of antique doctrines. Each regional bank has built up staffs of PhDs, in an arms race to see that their ideology prevails—not only inside the Fed, but across the economics profession.

    Result: In the depths of the worst recession since the Great Depression, some FOMC board members were rhapsodizing about the nirvana of deflation ahead!

    We see also in Europe the results of a central bank (ECB) unaccountable to democratic processes.

    There is a fascinating tension in democracies between “experts” and the voting public. And I think the voting public gets it right about as often. The experts are forever advocating longer and longer military involvement in a Vietnam, Iraq or Afghanistan. The public tires of these involvements, and sensibly asks, “What is in it for us?”

    I think the same is now true of monetary policy. The Fed is still fighting inflation. The public is asking, “And what about prosperity?” But the public has no way to vote the bums out.

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