How Congress Could Take Back Control of Money From an Inflationary Fed
Published in The New York Sun.
The Federal Reserve unilaterally announced in 2012 that it was committing the United States to perpetual inflation. It simply assumed that it had the power on its own authority to do this, and thus to constantly depreciate the value of our money at some rate of its own choosing. This was a remarkable claim, and Congress should make it clear that it was a mistake.
The Fed’s announced goal of 2 percent inflation forever means mathematically, although of course the Fed never mentions this publicly, that the central bank promises to make average consumer prices quintuple in a lifetime of 80 years. It made this quintuple-the-prices promise despite of the fact that the Federal Reserve Act instructs the Fed to pursue “stable prices.”
How in the world did the Fed think it that had purely on its own say-so the authority to determine the nature of the money for the United States? The most credible hypothesis seems to be that the Fed believed its own press releases about how “independent” it is.
Under the Constitution, the monetary powers of the government, in particular regulating the value of money, unambiguously belongs to the Congress. See Article I, Section 8. The Fed should be independent of the U.S. Treasury and President, who should not be able to order it to print up the money they want to finance the Treasury‘s deficits. The Fed, though, is fully accountable to the Congress for all its strategies and actions, especially anything as essential as committing America to perpetual depreciation of its currency.
That should have taken formal Congressional approval, but got not even hearings, let alone an approval. The chairman of the Fed at the time, Ben Bernanke, has written that he had some informal personal discussions with individual members of Congress, but that is far from formal approval by the Congress.
It is not too late for Congress to carry out its Constitutional authority over creating money and regulating the value thereof. Here are six steps Congress should take:
1. Make it explicit in the Federal Reserve Act that the Fed must have Congressional approval to commit the country to any long-term inflation target. Congress should suspend the 2 percent inflation target unilaterally announced by the Fed until such time as Congress has approved it or some other fundamental policy. For a better policy, I recommend stable prices and sound money. This could include a long-run average inflation target of approximately zero, with variations in the short term in a range of, say, between negative 1 percent and positive 2 percent.
2. Carry out a regular, formal oversight of the Fed’s financial statements. The combined Fed has accumulated operating losses in the amazing amount of $238 billion, which have wiped out its capital of $46 billion many times over. The Fed is designed to make profits for the government and it is impossible to believe that the Fed intended to lose $238 billion instead. This is a loss to the taxpayers. Congress should be conversant with the financial risks the Fed decided on its own to take or wants to take going forward.
3. Require the Fed, like the rest of the government, to follow standard accounting as defined for government entities by the Financial Accounting Standards Advisory Board. The Fed’s balance sheet hides its negative capital by pretending that its losses are an asset, while claiming it has the power to make up its own accounting rules. This claim should be overruled.
4. Require the Fed to steadily reduce its $2.1 trillion in mortgage investments to its historically normal level of zero. The Fed should not use its monopoly money power to subsidize any particular economic sector or interest. The mortgage investments are an important cause of the Fed’s losses; moreover, they stoked rapid house price inflation, which led to today’s unaffordable prices.
5. Recapitalize the Fed, which, with an actual capital of negative $192 billion, is technically insolvent. The first step should be to require the Fed to exercise the call it already has on all its private bank shareholders to purchase the half they have not yet paid in of their already committed subscriptions to Fed stock. It’s time for more capital and that would raise a new $39 billion. Further steps could be considered.
6. Require that Federal Reserve Bank dividends to the stockholders be paid only out of current profits or retained earnings. If there are none of either, then no dividends could be paid. One would think this principle would be obvious, but apparently it isn’t to the Fed.
With these steps, the Federal Reserve would get the message of who really has the money power under the Constitution.