Wealth & Poverty Review Non-Woolly-Minded Fed Critics Make Points

Adapted from Scott Powell’s February 5, 2014 Wall Street Journal letter to the editor
Former Federal Reserve vice chairman Alan Blinder recently asserted in the Wall Street Journal that the Fed “has been performing well,” and that its independence needs to be protected from Congressionally imposed audits and rules.
Given the nation’s last six years’ experience, which has witnessed and been subject to the worst post-recession recovery since the Great Depression–in terms of job formation, wage increases, individual hours worked and overall economic growth as measured by GDP–asserting good performance to the Fed is more than a stretch.
Interest rates are a pricing mechanism, and rates artificially held down for too long lose their ability to send the proper signals vital for maintaining a healthy economy. The Fed’s six plus years of zero interest rate policy has enabled the Federal Government to add over $7 trillion to the national debt–without causing debt service cost unsustainability alarms from going off, which would have happened some years ago under a normal interest rate environment. As a result, the Fed’s policies have increased the nation’s systemic risk, bringing the U.S. to the Rubicon of following Japan into economic coma and unavoidable default.
The fact is the Fed has already lost much of its independence, having come to the end of the line. It cannot cut zero-interest rates further, and additional debt monetization on top of a $4.5 trillion balance sheet is too risky to contemplate. Thus, the Fed’s ability provide national crisis insurance as the lender of last resort may be as questionable as the U.S. AAA-rating. Subjecting the Fed to a new independent audit and new rules geared toward restoring normalcy and predictability makes more sense now than ever.

Scott S. Powell

Senior Fellow, Center on Wealth and Poverty
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.