A Sound Dollar Act was introduced in the House of Representatives last month by the Vice Chairman of the House Joint Economic Committee, Congressman Kevin Brady (R, TX), and a companion bill was offered in the Senate by Senator Mike Lee (R, UT), who sits on, among other committees, the Senate Joint Economic Committee.
This bill has a couple of interesting aspects. For one thing, it would limit the Federal Reserve Bank system to a single mandate—to maintain price stability, i.e., control inflation. It would eliminate the Fed’s current other mandate, that of maintaining full employment.
This simplified requirement would both eliminate the conflict inherent between those two requirements and reduce the government’s involvement in what is essentially a private economy imperative—the decision to expand a business, or not, and to employ more or fewer personnel (with a free market economy’s inherent bias toward more employment stemming from a prior inherent bias in favor of growth).
The bill also would reduce the Executive Branch’s political dominance of the Fed. Currently, the Federal Open Market Committee, the instrument of the Fed that sets monetary policy, has as voting members seven men and women who are appointed by the President, the president of the New York Federal Reserve Bank (these eight are permanent voting members), and four presidents of the Fed system’s remaining eleven regional Federal Reserve Banks (the four rotate among the remaining eleven). Thus, monetary policy is set by Presidential appointees. Certainly, those appointees are nearly as independent as a President-appointed Supreme Court Justice, but still. Under the bill, all 12 presidents of the individual Fed banks would become permanent FOMC voting members, so the regions collectively would outnumber the President’s appointees. The advantage here is that the individual bank presidents are appointed by boards of directors made up of bankers and business leaders local to each of the Federal Reserve System’s regions. In this way, the regions, which better understand their situations than can a remote government, would gain significant influence over FOMC decisions that impact those regions.
The Sound Dollar Act also would limit the Fed to purchases of Treasury securities. This would reduce the ability of the Fed to make credit allocation decisions—to pick and choose which banks, for instance, it will “save” by buying from them the toxic asset du jour. Bailout or bankruptcy is a free market decision; no government instrumentality, other than a bankruptcy court, has any legitimate role in the matter.
I’m not sure allowing the Fed even to buy Treasuries is a good idea, though, unless it’s done after the free market has bought what it wants, and then only at that just demonstrated set of prices. If the Federal government is such a poor credit risk that it has trouble peddling its debt to private investors, or other governments, why should the American taxpayer be Dragooned into taking on that risk?
With some tweaks, this is a bill that would serve well. We just need to get the Big Government types out of government and so out of the way.
Incidentally, the WSJ‘s op-ed also has some words on the Fed’s success rate with that other mandate, maintaining “full employment,” and why it’s useful to take that DOC away from the Fed. RTWT.