Central Banks

Tuesday, May 8, 2012 - 15:50

US Econs Clash Over Need For Federal Reserve Dual Mandate


WASHINGTON (MNI) - Leading U.S. economists clashed over the Federal Reserve's dual objectives of price stability and maximum employment during a congressional hearing Tuesday, with one side arguing the central bank does more harm than good while their counterparts stressed the Fed's importance to the economy.

The debate occurred during a hearing by the House Financial Service's Domestic Monetary Policy and Technology Subcommittee -- chaired by one of the Fed's most ardent critics, Rep. Ron Paul.

The topic of the hearing was how to improve the Federal Reserve System, but the discussion largely revolved around the need for the institution at all.

Three of the five economists who spoke before the subcommittee agreed with Paul's oft-stated views that at the very least Congress should end the Federal Reserve's dual mandate, instead direct the central bank to focus solely on inflation.

"Multiple goals enable politicians to lean on the central bank to do their bidding and thereby deviate from a sound money strategy," said John Taylor, professor of economics at Stanford University.

Jeffery Herbener, professor of economics at Grove City College in Pennsylvania, took the argument even further, stating that the Fed should be abolished entirely because "the conduct of monetary policy under the Fed can bring no benefit to society at large."

His fellow panelist Peter Klein, associate professor of applied social sciences at the University of Missouri, argued against the need for any modern economies to have central banks at all.

"Central banks don't fight inflation; they create it," Klein said.

Two congressmen joined the debate as panel witnesses: Rep. Barney Frank, ranking member on the Financial Services Committee, and Rep. Kevin Brady, vice chairman of the Joint Economic Committee.

In March, Brady introduced the Sound Dollar Act of 2012, currently referred to the Subcommittee on Financial Institutions and Consumer Credit, which would strip the Fed of its dual mandate and eliminate funds for the Consumer Financial Protection Bureau, among other actions.

But given the current economic climate and slack labor markets, it would be "ludicrous" to eliminate the dual mandate, said Alice Rivlin, a former vice chair of the Fed and senior fellow at the Brookings Institution. She called the notion of eliminating the Federal Reserve "bizarre."

Rep. Frank also argued for the need to reform the Fed, but his focus was on the composition of the board of directors at regional Federal Reserve Banks. Such reform is at the heart of H.R. 3428, introduced by Frank this past November and referred to Paul's subcommittee, which would remove the presidents of the regional Fed banks from voting on the Federal Open Market Committee, the Fed's steering body.

Frank argued the government needed a process that gave it more oversight over the upper members of the Fed.

James Galbraith, Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin, praised Frank's bill, and said America "cannot escape the need for a central bank."

"It has been a long struggle to establish the right relationship between Congress and the Federal Reserve, and to bring the right degree of openness, responsiveness and accountability to that relationship," Galbraith said.

--Drew Pierson with a reporter with Need To Know News In Washington

** MNI Washington Bureau: 202-371-2121 **

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