House Financial Services Committee Rearranges Deck Chairs

Yesterday the House Committee on Financial Services marked-up three bills dealing with the Federal Reserve. Not only are none of them adequate substitutes for Audit the Fed, but they are the monetary policy equivalent of rearranging deck chairs on the Titanic:

1. H.R. 4278– Limits the assets the Federal Reserve may legally hold to gold, foreign exchange and International Monetary Fund (IMF) special drawing rights, and Treasury securities. It also requires the Fed to swap its current holdings for Treasury  securities.

The only circumstances where the Fed could hold other assets is an economic emergency, and then the Fed would have to exchange the assets for Treasury securities.

Limiting the Fed’s ability to purchase private assets is a good idea but by allowing the Fed to engage in “emergency purchases” of private assets it allows the Fed to intervene in captions markets at the time when it is most likely to do so and when it is most important that the Fed refrain from such actions. During an economic emergency the Fed should allow the market to correct the distortions introduced by prior Fed actions.

By allowing the Fed to hold gold, this bill raises the possibility that the Fed will interfere in the gold markets to manipulate the gold price. Allowing the Federal Reserve to purchase “special drawing rights” means the Fed can continue to work with international institutions and foreign central banks to prop up failed governments like Greece.

2. H.R. 4302– This legislation is intended to limit the Fed’s use of the Section 13(3) lending authority by requiring approval of the entire Federal Reserve Open Market Committee as well as all banking regulators with jurisdiction over the entity seeking the loan. The Fed would need Congressional approval for loans over 30 days.

This is well-intentioned legislation but does anyone doubt that the entire Open Market Committee or banking regulators would hesitate to approve loans, especially during an economic crisis? Or that Congress would not give into pressure from the big bank lobbyists to extend the loans?

3. H.R. 4720– This bill has the title the Monetary Policy Transparency Act, but it has nothing to do with Audit the Fed. Instead it is another attempt to force the Fed to follow a “rules-based” monetary policy. This bill requires the Fed to publish (in plain English) a “monetary policy strategy” every year specifying its policy targets and the instruments it will use to reach them.

More transparency is always good but this is no substitute for a full audit.

Like many reforms promoted by free-market economists who do not follow the Austrian School, this bill pretends that the system of fiat currency can somehow be fixed by implanting transparent rules. But the problem is with the system of government control of the money supply, not with how it is implemented. Any system of government controlled currency will inevitably cause market distortions.

For more on rules-based monetary policy see here and here.