National Debt, Inflation and the Federal Reserve
My good friend, Alex Pollock, recently authored a thoughtful and important article in the New York Sun about the need for Congressional oversight of the Federal Reserve, something recently advocated by Rep. French Hill in the House and Sen. Rand Paul in the Senate. I have always been opposed to such legislation, believing that the Fed should be independent of the political system. The past two decades of Fed activities have convinced me otherwise. The Fed has already lost its independence, despite Chairman Powell’s heroic efforts to get it back.
The era of the greatest Fed Chairman ever, Paul Volcker, is over, including his enormous achievements in ridding our nation of terribly damaging inflation so painful to the middle and lower economic classes. Absent intervention by the Fed, Congress always responds to inflation by cutting the national defense budget to extremely dangerous levels in a highly dangerous world and by increasing massive, unsustainable social welfare programs intended to assist the middle and lower classes better cope with inflation. That was the story of the 1960s and 1970s before Paul Volcker was named Fed Chairman by President Carter in 1979. The economy and our nation’s stature in the world reached new heights during the Reagan Presidency and the Volcker Chairmanship.
Since that magical period, the national debt has rocketed from $5.6 trillion at the end of the Clinton Administration to $34 trillion today with no end in sight. Not only has the Federal Reserve accommodated the federal debt by printing endless amounts of money, but it has also expanded its own debt from $1 trillion during the Volcker and Greenspan years, to roughly $9 trillion today. Further, the Fed reduced market interest rates beginning around 2010 to the unfathomable level of nearly zero. Talk about a prescription for disaster! Paul Volcker passed away in 2019, and I know he was appalled.?
Everybody loves free money, except the middle class and poor, who have trouble borrowing at any cost, and who have to pay for the inflation it causes. We purport to make it up to them with enormous social welfare programs whose cost we pay by slashing our ability to defend our nation against incredibly dangerous tyrants throughout the world. What’s then left over in debt we blithely pass along to our children and grandchildren – or so we pretend, as they won’t be able to pay it either.
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Current Fed Chairman Jay Powell, to his great credit, has attempted to turn things around against enormous resistance from the markets and many politicians. Under his leadership, interest rates have risen to roughly 5%, which is still a very low rate by historical standards. Recall that the prime rate was 8% when Volcker became Chairman of the Fed, and the Fed under his leadership took it to over 20% to finally break inflation’s back.
We all went through enormous pain to put the country back on solid footing with a strong economy and a strong national defense. The last four Presidents have thrown that amazing feat out the window. Everyone blames everybody else for the incredible mess we are in. In truth, we are all at fault. We elect too many of the wrong people who believe in the wrong things.
We are not the first great country to slide from the mountaintop – we follow a very long list of them: the Greeks, the Romans, and the British to name just the most recent. They became self-indulgent before being pushed aside by stronger, more disciplined foes. It is way past time for us to put our nation back on track. It needs to begin at the voting box.
Chairman Emeritus at Lynx Investment Advisory, LLC
1 年Thanks Bill. I wish I had a better solution but I don’t think Congressional oversight over the Fed will help. I tend to agree ?with the ?comments made by Mohammed Fheili. If Congress established a bipartisan committee to oversee the Fed, the chair would presumably go to the party in power who would have majority control. And that party would presumably always favor lowering rates for political reasons even when such a move would be ill advised. Congress will always be more political than the Fed. I’d rather take my chances with an independent Fed. And I expect that if the Fed is going to lower rates, it will do so in June but no later so as not to be accused of making a politically motivated decision just before the election.?
Granting Congress more oversight could potentially politicize monetary policy decisions, leading to short-term political interests overshadowing long-term economic goals. The Federal Reserve's independence from direct political interference allows it to make decisions based on economic data and analysis rather than partisan agendas. Furthermore, the reintroduction of bills like the Federal Reserve Transparency Act may impose unnecessary burdens on the central bank, hindering its ability to respond swiftly to economic challenges. While congressional input in economic forecasting and decision-making is valuable, granting Congress more authority over monetary policy could undermine the Fed's ability to act decisively in times of crisis. Instead of increasing congressional oversight, efforts should focus on improving transparency through enhanced communication between the Fed and the public. The Fed could also engage in more outreach and education to ensure that its decisions are better understood by policymakers and the general public. Overall, while Pollock's concerns are valid, his proposed solutions may not be the most prudent way forward.
Chairman Emeritus at Lynx Investment Advisory, LLC
1 å¹´Bill, but wouldn't Congressional oversight make it more political?