Say It Repeatedly, The Fed Isn’t Nor Can It Be ‘Independent’

The Fed can never be independent. Economists should spare readers of any further commentary calling for what can’t be.

Long before the Fed existed, and just the same to this day, there were and are all manner of private, profit-motivated sources of credit ready to liquefy financial institutions enduring near-term liquidity problems despite quality assets. Those entities, including combinations of actual banks, also acted and act as regulators par excellence precisely because no private entity lends blithely.

Which speaks to the Fed’s superfluity. Though created to lend to “solvent banks,” no solvent bank would ever need the Fed. See the previous paragraph. Which means the Fed exists to suffocate the message of the market.

Fed officials are appointed by politicians, frequently after months and years spent courting those politicians. Considering Ben Bernanke alone, eager to prove he was a “Republican” as a way of currying favor with Republicans who might whisper to then President George W. Bush about his alleged attributes, Bernanke courted countless Republicans in addition to Bush on the way to a spot at the top of Fed.

No doubt others, including yours truly, have for years pointed to numerous instances of fighting between politicians (this includes presidents) and central banks as evidence that central banks are “independent” in name only, but if anything, the commentary was similarly superfluous. The Fed is an outsourced creation of Congress whose officials are appointed by presidents and confirmed by Congress. Of course it’s political, and the opposite of independent.

After which, see its superfluity yet again relative to market entities that have long and capably filled central bank functions of providing near-term liquidity to the solvent, along with regulation to ensure sound operation based on those loans. Which is just a comment that the Fed is excess by political design, whereby it does what market actors won’t do, and have never done.

Despite this, economic figures in academia like Alexander Salter continue to write wistfully about so-called central bank independence. That they’re writing about it explains the impossibility. What’s political in creation quite simply can’t be.

Yet even if it was? It wouldn’t matter. Economists are still economists, which means they’re not independent of the myriad fallacies that stalk their profession. The Fed employs more economists than any other entity in the world, and economists believe economic growth causes inflation. Quite the opposite, but “independent” economists at the Fed expose the central bank to even greater superfluity with their view that credit, which is a productive effect of growth (we borrow money for what it can be exchanged for), must be shrunken when – yes – the economy is growing. That’s evidence of a central bank in thrall to a fallacy, and ready to further suffocate actual market signals. And it’s not the only one.

While money in circulation is always and everywhere a mirror of economic activity, Salter caucuses with a growing crowd of PhDs that believes central banks can and must centrally plan so-called “money supply” so that they can by extension centrally plan rates of unemployment, national income, and the screaming falsehood that is GDP. These individuals in thrall to monstrous fallacy rooted in central planning describe themselves as “market monetarists.” That they doth protest too much with their self-description insults understatement.

The Fed on auto-pilot? Salter et al have paid lip service to the latter too, but then who writes the code to operate the proverbial robot? The same economists who believe in the same fallacious economic notions? Well, yes.

The Fed was created to do for the U.S. political class what market actors would not. Which means the Fed exists to intervene politically where market actors would not. The Fed isn’t independent, and can’t be.