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Lawmakers, economists argue for Fed reforms

WASHINGTON — Lawmakers and economists from both sides of the aisle made their case for reforming or ending the Federal Reserve system in a House subcommittee hearing Tuesday.

The hearing, chaired by Texas Republican Rep. Ron Paul of the Subcommittee on Domestic Monetary Policy and Technology, focused on several proposals to alter the Federal Reserve Bank either through more oversight by Congress or by eliminating the Fed’s dual mandate of price stability and unemployment.

“Except in the very short term, monetary policy cannot boost real output and job creation,” Texas Republican Rep. Kevin Brady testified.

Brady’s Sound Dollar Act would direct the Fed to focus only on long-term price stability and not unemployment.

The act also increases the Fed’s transparency and accountability, diversifies the Federal Open Market Committee to reflect geographic diversity, ensures credit neutrality of future FOMC purchases and creates congressional oversight of the Consumer Financial Protection Bureau.

Brady’s bill would create what he calls a “rules-based regime” where the Fed would establish a target inflation rate and would tighten monetary policy when the rate rises above the target rate and loosen monetary policy when the inflation rate is below the target rate.

“The last four decades of U.S. monetary policy demonstrate the advantages of a rules-based
regime over a discretionary one. During the 1970’s, the Federal Reserve had ‘go-stop’ policies, in which monetary policy quickly swung from ease to tightness and back again. This incoherence produced a highly volatile real economy and a rising inflation rate,” Brady told the subcommittee.

Brady’s sentiment was echoed by testimony from John B. Taylor, a Stanford economist and Hoover Institution fellow who first proposed the Taylor Rule.

“Nearly a century of experience under the Federal Reserve Act has provided plenty of evidence that more systematic rules-based monetary policies work and more unpredictable discretionary policies don’t,” Taylor said.

Massachusetts Democratic Rep. Barney Frank disagreed with Brady that the dual mandate was the problem with the Fed, saying that the real problem is the influence of the financial industry on the Federal Reserve Board and the regional Fed banks.

“The problem you have now is this. The regional Fed bank Presidents are picked by bankers,” Frank told the subcommittee.

Frank’s bill would have additional Federal Open Market Committee members appointed by the president of the United States for limited terms and confirmed by the Senate. Each additional member would represent interests as disparate as agriculture, industrial, consumer and labor. To Frank, this would end the Fed’s “private sector government” and make the Fed more accountable to the public.

“I cannot think of another element of American government where there is formal binding legal power given to the representatives of the industry that’s in question, he said. “I don’t think the American people are aware of the undemocratic nature of this.”

There was little discussion about Paul’s bill, the Federal Reserve Board Abolition Act. Two of the economists present on the second panel sympathized with Paul, and when Texas Democratic Rep. Al Green asked who on the panel supported complete abolition of the Fed they promptly raised their hands in support.

“Economic theory and historical evidence demonstrate that a central bank confers no benefit on society at large,” economist Dr. Jeffrey Herbner of Grove City College, said in his testimony. “The Fed should be abolished and a market monetary system of commodity money and money certificates should be established.”

“The Fed simply does not know the ‘optimal’ supply of money or the ‘optimal’ intervention in the banking system; no one does,” Dr. Peter Klein of the University of Missouri, testified. “Add the standard problems of bureaucracy — waste, corruption, slack, and other forms of inefficiency well known to students of public administration — and it becomes increasingly difficult to justify control of the monetary system by a single bureaucracy.”

Other bills that were supposed to be considered but only briefly mentioned or not mentioned at all were sponsored by Reps. Mike Pence, Marcy Kaptur, Dennis Kucinich and John Conyers.

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