Passing the Torch


G&BNot on our watch!

The advantage of a worldwide system of paper money is—or should be—that market participants observe national policies and adjust interest rates and exchange rates accordingly. Their role is to reward responsible policies that create value and punish foolish policies that destroy value. They do not need bureaucrats by any title to set interest rates and exchange rates.

The Federal Reserve has abrogated its role to political expediency in providing the credit funding of irresponsible and unsustainable government spending. There are no limits? I guess we’ll have to relearn the truths about central banking in a fiat currency world, explained in this week’s Barrons:

The Chair at the Head of the Table

By THOMAS G. DONLAN

Where does Janet Yellen stand, or sit?

The person who styles herself “chair” of the Board of Governors of the Federal Reserve System was in the hot seat last week. Admittedly, were Janet Yellen to prefer chairwoman or chairman for her title, it would make no difference to the legion of monetary skeptics who expect nothing but the worst from her supervision. Nevertheless, her assumption of the pseudo-title of chair, by which she makes obeisance to clumsy gender politics, is not an encouraging sign of future success.

Nor did we find much reason for optimism in the chairwoman’s opening report to the House Banking Committee and the Senate Finance Committee.

Although Yellen impressed some observers as unusually clear in her report and testimony, that could be an illusion deliberately created. Yellen is widely taken to be an inflationist, more interested in the number of jobs in the economy than in the value of the money paid to the workers. This is normal for an academic economist and not so dangerous for a vice chairman who controls only one vote, but a Fed ruler who wants to try to control money and the economy dares not have an obvious ruling philosophy.

It’s hard enough for any leader to follow the Fed’s contradictory mandates, seeking, among other things, maximum employment, stable prices, and a secure financial system, without making the impossibility obvious by the excessive use of clarity.

If those who speculate in currencies and bonds know what Fed policy will be, the head of the Fed will have less power to talk the markets up or down, and that’s a power that the last three chairmen of the Fed cherished and tried to expand. They were successful enough that a leading Washington newspaper last week could describe Yellen’s new job as being “steward of the nation’s economy.”

Understand, however, that talking the markets up and down is not a good use of a chairperson’s eloquence, and that the economy does not need a steward, especially not a steward whose sole real power is to create money.

The advantage of a worldwide system of paper money is—or should be—that market participants observe national policies and adjust interest rates and exchange rates accordingly. Their role is to reward responsible policies that create value and punish foolish policies that destroy value. They do not need bureaucrats by any title to set interest rates and exchange rates.

The central bank should follow a simple rule, such as Milton Friedman’s advice to raise the money supply by a specific small amount every month, or John Taylor’s advice to respond to increased inflation by raising real interest rates proportionately.

Most central bankers, however, believe it is their job to manipulate markets with interest-rate policies supported by empty words. In the short term, they can fool speculators, but the truth will out, and the truth will create disillusionment and cynicism, leading eventually to disaster. In the case of the U.S., the short term has lasted for decades, but that does not mean that there is no such thing as disaster.

Experience teaches that the only way to stop central bankers from deceiving the markets is to make them stop talking.

Yellen should roll back former Chairman Ben Bernanke’s open, transparent communications policy as fast as she can. The boss of the Federal Reserve should have little or nothing to say to the public, because the public is not her constituency—not even the unemployed part of the public. Her appropriate responsibility is to provide monetary stability to the economy, not soothing words for political stability. The chairwoman or chairman should be as silent and apolitical as the chair she or he sits on at Fed meetings.

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