Re: ECB and world-wide recession

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

See my responses below

-----Original Message-----
From: Henry C.K. Liu [mailto:hliu@xxxxxxxxxxxxxx]
Sent: Tuesday, May 08, 2001 7:13 PM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: ECB and world-wide recession


Clifford, I generally appreciate your points intellectually.  It is
simplistic
also to view Clinton as a Democrat.  Some have said he is the best liberal
Republican president in history.

Probably we do not want to delve into too lengthy a discussion of Clinton.
We can argue over whether he was a liberal Republican or a moderate Democrat
to little avail. But my point about the anti-Federalists goes a lot deeper.
The anti-Federalists wanted fragemented sovereignty. They never really
wanted the Constitution or the Federal system. They wanted states grouped in
a very loose alliance that would protect the rights and property of slave
holders. To some degreee, they were able on occasion to make alliance with
other agricultural interests. But they were not for the "common man". Though
often disguising their arguments in anti-elitist rhetoric, they themselves
supported the worst and most vicious forms of social heirarchy. They were
fundamentally anti-Democratic. The Populists (at least in some
manifestations) and the Progressives tended to be Democratic and wanted an
effective national government that could address common national problems.
Alas, the Populists had a tendency to degenerate into nativism and
anti-intellectualism (Jennings Bryan also prosecuted the Scopes Monkey Trial
and drew support from religious fundamentalists). The Progressives had a
tendency to degenerate into Puritanism-witness their support for Prohibition
and the Harrison Tax Act.

It does not surprise me that post-Keyneisans would prefer pro-Federalist
policy
and be pro-bank. But that only shows their bias and not an argument based on
merit.  Central Banking is not a a TINA event.

What is your alternative? I view Central Banks as part of the process of
evolution and learning by doing. I might prefer Central Banks to follow
alternative policies, just as I might prefer the FTC do a more vigorous job
of enforcing anti-trust law. The fact that capture of regulatory agencies
occurs is not a very good argument for abolishing regulatory agencies.
Central Banks make it possible for governments to use monetary policy to
promote full employment. If Central Banks choose instead to make fighting
inflation the main priority, it does not follow that I would get more full
employment policy by abolishing Central Banks. I would also not get more
anti-trust enforcement by abolishing the FTC.

Particularly when CBs seldom do
what they claimed they were ordained to do.  Part of the purpose of Bretton
Woods was to limit the powers of CBs.  With the collapse of Bretton Woods,
CBs
have gained much power not originally assigned to them, nor deemed desirable
for
them to have.

No. Bretton Woods was designed to allow Central Banks to maintain policy
autonomy in a world of fixed exchange rates and  capital controls. It was an
alternative to the Classic Gold Standard of the 19th century which forced
deficit nations into painful deflations in attempts to maintain parity.


On what political theory rests the "independence" of CBs?  The original Bank
of
England was justified by the authority of royal charter, based on the divine
right of kings.  In a democracy, the representative form, assuming one
subscribes to it as a preferred form of government, the people is the
sovereign.
If even war is not above politics, why is monetary policy, a matter much
less
technical than war, above politics?

This is the real argument-not whether or not we should have a Central Bank,
but what should its policy priorities be? Complete dependence of the Central
Bank could also have negative consequences. As in some transitional
economies, Central Banks become merely clearing agencies for government
debt, effectively monetizing debt-thus undermining the conduct of monetary
policy. Or consider the potential destabilizing impact of a Central Bank
subject to political whim.

In the U.S., Humphrey Hawkins requires the FED to report to Congress on its
dual role of containing inflation and unemployment. I think it would be
great if U.S. Congressmen did something other than fawn over Greenspan.
Clearly, we can make FED actions more transparent.

The best source on the U.S. FED (IMO) remains "Secrets of the Temple".

Henry C.K. Liu

Clifford Poirot wrote:

> Henry,
>
> The First National Bank was able to function as if it were a Central Bank
> (acting as a brake on note expansion and as a lender of last resort)
because
> it was the depository for government finances. Thus it had market power
and
> was able to use this market power effectively to insure prompt payment of
> notes.
>
> As I indicated in my earlier messages it is simplistic to see Hamilton and
> then Biddle as the opponents of popular forces, and the free bankers,
> Jeffersonians and Jacksonians as populist Democrats. The lack of a First
> National Bank left the U.S. economy more vulnerable to international
> fluctuations during the Napoleanic War and again, more vulnerable to
swings
> in cotton prices in the late 30's.
>
> One may disagree, to some extent with Hamilton's role. Hamilton did
> represent the forces of "monetary discipline" and thus was resented by the
> indebted farmers of Massachusetts. However, Shay's rebellion predates the
> establishment of the First National Bank and its establishment probably
> helped provide some stability, making the cycle of indebtedness that led
to
> Shay's rebellion less likely. Overall, Hamilton was a mercantilist, and an
> early advocate of strategic use of government debt and finance as well as
> the infant industry tarriffs to promote U.S. Economic Development. He also
> favored national investment in infrastructure-all opposed by the
> Jeffersonians anti-Federalist program.
>
> I think it is a fundamental misunderstanding to read U.S. political
economic
> history in a backwards teleology-casting Hamilton as the modern supply
side
> Republican (which he certainly was not) or Jefferson or Jackson as
> precursors of agrarian populists (which they really were not-though
elements
> of Jefferson's agrarian philosophy has had an influence on U.S.
agricultural
> policy to this day).
>
> If you forced my hand to choose between Hamilton and Biddle (who were at
> least competent and knowledgeable) vs. the anti-bank forces which often
> represented some of the most ignorant, backwoods elements of U.S. politics
> as well as slaveholding forces, i'd rather not make the choice. But if you
> really forced me, I would take the Federalists over the anti-Federalists
> anyday and the First and Second Banks over the anti-bank forces.
>
> -----Original Message-----
> From: Henry C.K. Liu [mailto:hliu@xxxxxxxxxxxxxx]
> Sent: Monday, May 07, 2001 7:24 PM
> To: J. Barkley Rosser, Jr.; pkt@xxxxxxxxxxxxxxxx
> Subject: Re: ECB and world-wide recession
>
> Barkley, we don't really disagree.  The Populists never had a chance to
> control
> the Fed, not to mention the Jekyll Island controversy and the defeat of
> William
> Jennings Bryan, the Nebraska Populist.
> Yet Hamilton's National Bank was not exactly a Reserve Bank.  The first
Bank
> of
> the United States was first launched by Hamilton after the Revolution
> (Secession, really) and was allowed to expire in 1811.  The second BUS was
> chartered by Congress amid the inflationary surge in the aftermath of the
> War of
> 1812.  Directed by Nicholas Biddle, it was modeled after the Bank of
England
> which was chartered in 1694 to John Law, to safe guard the value of money.
> The
> BUS was a private entity with sovereign charter and it operated in close
> harmony
> with money center banking interests.  Jackson campaigned against the BUS,
> attacking it as a symbol of corporate power, monopoly privilege, founded
on
> "a
> distrust of the popular will as a safe regulator of political power."
> Jackson was really more than a Democrat.  He was a bipartisan populist
with
> much
> support from conservatives who also were suspicious of corporatism.
> Jackson's
> triumph in 1832 stripped the Biddle's BUS of much of its power of tight
> money
> and a boom followed.  The decade of 1830 was a decade of extraordinary
> development in US economic history.  It put Chicago on the map.
> But alas, we now have a consensus that the people can no longer be trusted
> with
> important issues such as the nature of their money.
>
> Henry C.K. Liu
>
> "J. Barkley Rosser, Jr." wrote:
>
> > Henry,
> >       The populists wanted silver money.  The Fed
> > was never set up to have a bimetallism standard.
> > It is one thing to call for "federal regulation of
> > the banking system" (which is provided by such
> > bodies as the Comptroller of the Currency) and
> > quite another to call for a central bank.
> >       The older history is that the predecessors of
> > the populists, the Jacksonian Democrats who were
> > also rural based, were the opponents of a National
> > Bank.  It was Alexander Hamilton and the Federalists
> > who imposed a National Bank.  It was Jackson and
> > Van Buren who got rid of it and gave us the more or
> > less "free banking" system that we had until 1913.
> > Of course, the big money center banks in New York
> > got control of that system.  The populists wanted
> > somebody to control them.  But they controlled
> > the Fed from the beginning.  It was never set up to
> > satisfy demands by the populists.
> >       So, you win one on the nature of the DB.  I win
> > one on the origins of the Fed, :-).
> > Barkley Rosser
> > ----- Original Message -----
> > From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
> > To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Monday, May 07, 2001 5:47 PM
> > Subject: Re: ECB and world-wide recession
> >
> > > The founding of the Federal Reserve System were first championed by
> > populists
> > > who were ordinary citizens, rather than sophisticated economists or
> > political
> > > leaders.  In 1887, a group of desperate farmers in  Lampasas County,
> Texas
> > > formed the Knights of Reliance to resist impending ruin by "more
> speedily
> > > educating themselves" about the day when "all the balance of labor's
> > products
> > > become concentrated into the hands of a few."  It became the Farmers
> > Alliance
> > > which by 1890 flowered into the populist movement.  The populist
agenda
> > was a
> > > major reform source for more than five decades, giving the nation a
> > progressive
> > > income tax, federal regulation of railroads, communications and other
> > public
> > > utilities, anti-trust regimes, price stabilization and credit programs
> for
> > > farmers.
> > > LBJ was the last president with strong populist roots.
> > >
> > > The core issue behind the populist movement was money.  Populists
> attacked
> > the
> > > "money trusts", the gold standard, and the private banking system.
> > > The spirit of this brief movement was captured by Lawrence Goodwyn in
> his
> > book:
> > > Democratic Promise: The Populist Movement in America.
> > >
> > > Falling prices of farm produce were the catalyst of protest.  Falling
> > prices
> > > were also inevitably accompanied by usurious interest rates.
> > > Both flowed from one condition - a scarcity of money.  Most Americans
> > today do
> > > not remember what historians call the Great Deflation that lasted
three
> > decades
> > > between 1866 and 1896.  The Great Deflation worked in reverse of
> > inflation.
> > > Inflation damages the rich and spreads wealth widely, allowing the
> middle
> > class
> > > to grow in size and to enjoy higher standards of living. Deflation
> > > reconcentrates wealth and reduces the living standard of the middle
and
> > working
> > > classes.  Borrowers face ballooning nominal debts
> > > from falling prices and wages.  Deflation make true the American
> folklore:
> > the
> > > rich get richer and the poor gets poorer.
> > >
> > > Fernand Braudel  in his epic chronicle of the rise of capitalism
showed
> > that
> > > cycles of price inflation and deflation were recurring rhythms in the
> > world's
> > > economies long before the founding of the USA.  The very discovery of
> > America
> > > was a great inflationary development by increase of money supply in
> Europe
> > by
> > > the plundering of Inca gold mines.  The Gold inflation lasted three
> > centuries
> > > and was instrumental to the rise of Europe.
> > >
> > > The Federal Reserve System was founded to represent the financial
> interest
> > of
> > > all the people.  In its obsessive phobia of inflation, the Fed has
> > betrayed its
> > > original mandate.  The chairman of the Fed should be a member of the
> > common
> > > folks, not a Wall Street economist who applauds "creative
destruction."
> > >
> > > That is Greenspan's real conflict of interest.
> > >
> > > The creation of the Federal Reserve System was a confluence of
political
> > > pressures.  Fundamental among these pressure was the new awareness, as
> > Braudel
> > > hinted, of a heretical proposition that capitalism cannot sustain
price
> > > stability through market forces.  The proof of that proposition is
that
> if
> > it
> > > were possible, centuries of experimentation and innovation would have
> > surely
> > > devised a monetary system that could provide stability. But none came
> > forth. It
> > > was increasingly recognized that the process of capital
> > > accumulation inherently produces periodic cycles of fluctuating money
> > value:
> > > inflationary "easy money" stimulating economic growth, spreading
wealth,
> > > followed by its depressant opposite "tight money" slowing down growth,
> > > reconcentrating wealth.
> > > This peculiar nature of capitalism works until the arrival of
political
> > > democracy.  Any government adopting any money system that makes stable
> > money a
> > > permanent feature would eventually confront political upheaval. There
> was
> > no
> > > golden means of money value where all economic participants can be
> treated
> > > equally and justly.  Technically, capitalism decrees that money that
is
> > fixed in
> > > perpetual equilibrium  is a formula for permanent stagnation.
> > >
> > > The tight money at the beginning of the 20th century was caused by the
> > > restoration of the full gold standard (the Gold Standard Act of 1900)
> from
> > the
> > > bimetallism that had been used in the US through much of the 19th
> century.
> > > Bimetallism had the fault of "bad money driving out good."  (Gresham's
> > Law)
> > > Permanent tight money means permanent high interest rates. And the
money
> > supply
> > > based on the gold standard after 1900 was inflexible for meeting
> > fluctuating
> > > demands of the economy.  The resultant illiquidity rendered the
> financial
> > system
> > > inoperative.
> > > The liquidity squeeze typically started in the the South and West when
> > farmers
> > > bring their crops to market and traders and merchants needed short
term
> > loans to
> > > finance a seasonal ballooning of trade.  Rural banks were forced to
turn
> > to New
> > > York for funds.  Country bankers and their farm clients learned from
> > experience
> > > that life/death decisions over the economy of Kansas, Texas and
> Tennessee
> > reside
> > > in the Wall Street offices of the likes of JP Morgan.  Thus the term
> > "money
> > > trusts" was no radical sloganing or activist hysteria.  It was a very
> > mainstream
> > > term that everyone in the West and South understood in the 1900s.
> > >
> > > The Populists first proposed a solution to the money question in
August
> > 1886 at
> > > Cleborne, Texas where the Framer Alliance held a convention.
> > >
> > > The "Cleburne Demand" borrowed from the Greenback Party which in the
> > previous
> > > decade had fought the Gold Standard and defended Lincoln's fiat money.
> > > Among the "radical" demands were federal regulation of the banking
> system
> > and a
> > > gold based national currency.  The Populists distrusted both Wall
Street
> > and
> > > Washington and wanted an independent institution to carry out this
task.
> > They
> > > were openly inflationist, and advocated an expanding money supply and
> > > a federal issue to replace all private bank notes.  Their slogan:
"legal
> > tender
> > > for all debts, public and private" appears today on Federal  Reserve
> > bills.
> > > Orthodox economist of the day scoffed at the proposals.
> > >
> > > Henry C.K. Liu
> > >
> > > "J. Barkley Rosser, Jr." wrote:
> > >
> > > >      "Populist supporters"?  Are you kidding?
> > > >      I don't know, maybe the populists supported
> > > > creation of the Fed.  I suppose that they did.  But,
> > > > they did not initiate its establishment.  It was always
> > > > from Day One a creature of the financial establishment
> > > > in New York.  After the "Rich Man's Panic" of 1907,
> > > > J.P. Morgan got tired of playing the role of a central
> > > > banker and had a committee of leading financial lights
> > > > appointed to determine what should be done to avoid
> > > > a repeat.  They came up with the Fed.  No populists on
> > > > that committee, although they may have succeeded in
> > > > suckering in the rubes.
> > > > Barkley Rosser
> > > > ----- Original Message -----
> > > > From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
> > > > To: <pkt@xxxxxxxxxxxxxxxx>
> > > > Sent: Sunday, May 06, 2001 8:51 PM
> > > > Subject: Re: ECB and world-wide recession
> > > >
> > > > > William:
> > > > >
> > > > > We have gone over this disagreement before and I have submitted
> > several
> > > > long
> > > > > posts on the history of the Fed that outline how the banking
> interest
> > > > wrested
> > > > > control of the Fed from the populists farm interest.  So we will
> > continue
> > > > to
> > > > > disagree.
> > > > >
> > > > > As for the ECB, it is a central bank without a government.
> > Nevertheless,
> > > > the
> > > > > German government really set the original rules on the euro which
> the
> > ECB
> > > > is
> > > > > required by law to follow. Thus the ECB is not "independent" in
the
> > sense
> > > > that
> > > > > it is free to set policy to encourage inflation. The Bank of Japan
> is
> > > > getting
> > > > > some apparent separation from MITI and the Ministry of Finance,
but
> > > > everyone in
> > > > > Japan knows that such cosmetic developments were really just to
> > appease US
> > > > > pressure.
> > > > >
> > > > > Both Blinder and Rivlin may be competent economists, but that was
> not
> > the
> > > > reason
> > > > > they were put on the Fed Broad.  The reason was their ideologies
> > matched
> > > > those
> > > > > of the administrations nominating them.  Lindsey was nominated for
> the
> > > > same
> > > > > reason as Taylor is about to be.
> > > > >
> > > > > I was not thinking of Bush when I said: "The argument of expertise
> in
> > a
> > > > > democracy ends at the staff level", but rather I was thinking of
> FDR,
> > > > Kennedy
> > > > > and Clinton.  Not Carter, who also had no expertise but thought he
> > did.
> > > > >
> > > > > Anyone who labels the statement: "The core of the Federal
Reserve's
> > > > political
> > > > > base is the commercial banks." as "nonsense" is beyond reason.
You
> > might
> > > > as
> > > > > well call the Department of Energy a voice of environmental
> protection
> > or
> > > > the
> > > > > Dept. of Commerce the voice of labor.   I remember you once
> challenged
> > the
> > > > term
> > > > > "populist" as meaningless despite the fact that it is a well
> > documented
> > > > movement
> > > > > in US history.
> > > > >
> > > > > You wrote: "Your lengthy discussion of Volcker and the volatile
> > interest
> > > > rate of
> > > > > the 1980-1982 period was quite off the mark when you said the Fed
> > engaged
> > > > in an
> > > > > "exercise in creative uncertainty to disrupt
> > > > > the financial markets about interest rate stability."
> > > > > Well. it so happened that that description came from Volcker
himself
> > in
> > > > his
> > > > > presentation to the Open Market Committee on the Fed's new
> monetarist
> > > > operating
> > > > > system, and it is not worded the way you misquoted my post which
> was:
> > "an
> > > > > exercise in "creative uncertainty" to disrupt the financial
markets'
> > > > complacency
> > > > > about interest rate stability."
> > > > >
> > > > > You said: "It is increasingly apparent that your extreme dislike
of
> > the
> > > > Fed and
> > > > > its role in monetary policy is getting in the way of a balanced
> > > > (rational?)
> > > > > view."
> > > > >
> > > > > I am not attacking the Fed for being ideologicl/biased.  I am
merely
> > > > pointing
> > > > > out that by definition, it is not even intellectually independent
in
> a
> > > > technical
> > > > > sense.
> > > > >
> > > > > You and I have different views on the Fed, you being apologetic
and
> I
> > > > critical.
> > > > > I do not harbor "extreme dislike" of the Fed, though it must have
> > sounded
> > > > that
> > > > > way to you when I pointed out that the Fed is not the institutions
> > that
> > > > the
> > > > > original Populists supporters hoped it would be. Yet I am being
> > critical
> > > > only on
> > > > > the inconsistency of the Fed in its own terms.  I have yet to air
> what
> > I
> > > > really
> > > > > think about the whole notion of central banks and monetary systems
> for
> > > > fear that
> > > > > I be attacked again as a communist propagandist.  Americans have a
> > right
> > > > to view
> > > > > communists as evil, but it is misleading to imply that communists
> > (which I
> > > > may
> > > > > and may not be one, but its nobody's business if I am or not) are
> not
> > > > > intelligent or rational.
> > > > >
> > > > > I will bypass your description of Volcker's intention as being to
> > break
> > > > the
> > > > > wage-price spiral, except to say that if that was what he was
trying
> > to
> > > > do, his
> > > > > judgment as an economist should be questioned, for even Nixon knew
> > that
> > > > > wage-price spiral could not be broken by monetary measures, only
> > > > insitutionist
> > > > > measures, i.e. wage-price controls.  So much for expertise.
> > > > >
> > > > > And you went on to say: "For political cover, Volcker operated
under
> > the
> > > > > monetarist prescription of controlling the growth rate of the
money
> > > > supply."
> > > > > Some independence!
> > > > >
> > > > > As for Hoover and Mellon, the Federal Reserve was identified by
many
> > > > historians
> > > > > as being centrally responsible for the 1929 crash (for letting it
> > happen)
> > > > and
> > > > > its devastating aftermath (for failing to reverse the devastation
> > > > quickly).  By
> > > > > your own view, if the Fed were so politically independent, history
> > would
> > > > have
> > > > > been different.  Ben Strong died in October 1928, but three months
> > before
> > > > his
> > > > > death he warned colleagues in July that the banks were engaged in
> and
> > > > > encouraging speculation that would end in disaster. He wanted to
> > tighten
> > > > credit
> > > > > and restrain speculative lending.  Yet Adolph Miller and others of
> the
> > Fed
> > > > Board
> > > > > charged posthumously that Strong had personally engineered the
major
> > > > easing of
> > > > > credit in the summer of 1927, which Strong did to help the central
> > banks
> > > > of
> > > > > Europe. This generally unpublicized fact was political dynamic:
the
> > idea
> > > > that
> > > > > the Fed would secretly serve the needs of international banking at
> the
> > > > expense
> > > > > of domestic interest was beyond the tolerance of the US public
even
> > today,
> > > > let
> > > > > along in 1927, even though Strong argued that US assistance to
> Europe
> > was
> > > > > fundamentally a matter of self interest.  As it happened, Strong
was
> > > > technically
> > > > > flawed.  He was pushing on a credit string in Europe which was in
a
> > severe
> > > > > liquidity trap and the surplus money flowed instead to the US
equity
> > > > markets,
> > > > > fueling the bubble that abruptly burst in October 1929.  After the
> > crash,
> > > > the
> > > > > Fed without Strong, failed to flood the market with money, as some
> > argued
> > > > that
> > > > > Strong would have done, allowing the money supply to shrink by
> > one-third.
> > > > The
> > > > > decision not to ease was urged on the Fed by the Federal Advisory
> > Council,
> > > > a
> > > > > commercial bank lobby which enjoyed legal status as official
advisor
> > in
> > > > secret
> > > > > sessions.  Its advice was to let nature take its course. Of
course,
> we
> > all
> > > > know
> > > > > that nature had nothing to do with the earlier easy credit that
led
> to
> > the
> > > > > crash.
> > > > >
> > > > > Henry C.K. Liu
> > > > >
> > > > >
> > > > >
> > > > >
> > > > > "William F. Hummel" wrote:
> > > > >
> > > > > > Henry Liu wrote:
> > > > > >
> > > > > > >James Cumes made a very important point, which has been debated
> in
> > the
> > > > past
> > > > > > >on pkt.
> > > > > >
> > > > > > James Cumes has not clarified what he meant by the "government"
> > > > > > vis-a-vis setting monetary policy.  Let's let him express his
own
> > > > > > views on this point.
> > > > > >
> > > > > > >The Fed is the only central bank that is "independent" the from
> > > > > > >executive branch of the government.
> > > > > >
> > > > > > This is simply untrue.  The central banks of most major
economies
> > > > > > are more or less independent.  The ECB is far more independent
> > > > > > than the Fed, as was the BUBA before becoming a part of the
ESCB.
> > > > > >
> > > > > > >Yet the Fed does operate with ideological biases.
> > > > > >
> > > > > > What's new?  Show us a government institution (including any
> > > > > > department of the executive branch) that operates without
> > > > > > reflecting the biases of its leaders.  I guess when you don't
> > > > > > agree with their decisions it's ideological, otherwise its
> > > > > > unbiased.
> > > > > >
> > > > > > >Its governors are not nominated on expertise merit but
> > > > > > >are nominated by the banking industry and politically
appointed.
> > > > > >
> > > > > > Sweeping generalizations will usually get you in trouble.  Were
> > > > > > Blinder or Rivlin nominated by the banking industry?  Did they
> > > > > > lack expertise?
> > > > > >
> > > > > > >The argument of expertise in a democracy ends at the staff
level.
> > > > > >
> > > > > > If true, then we are in trouble.  Maybe you were thinking of
Bush
> > > > > > when you said this.
> > > > > >
> > > > > > >Decisions
> > > > > > >making in a true democracy reflects the will of the people,
with
> > expert
> > > > > > >staff advice to prevent counter productiveness.
> > > > > >
> > > > > > Thus implying the bureaucracy is infallible and "unbiased".
> > > > > > Where can we find such people?
> > > > > > >
> > > > > > >The administration, on the other hand, is popularly elected, as
> > least
> > > > > > >supposed to be so.  Thus the President's cabinet, including the
> > > > Secretaries
> > > > > > >of commerce, Labor and treasury should really determine
monetary
> > > > policy.
> > > > > >
> > > > > > Let's remember that the president appoints the Board of
Governors
> > > > > > of the Fed as well as the cabinet heads.  Both groups are
subject
> > > > > > to approval of the Senate.  Thus both groups reflect the will of
> > > > > > the people's elected representatives.  Your suggestion that the
> > > > > > President's cabinet should determine monetary policy would
simply
> > > > > > shift the focus from economic to political.  I am convinced it
> > > > > > would also be a serious mistake.
> > > > > >
> > > > > > Cabinet officers are highly political.  There primary allegiance
> > > > > > is to the president.  They don't last if they stray from the
> > > > > > president's line.  Some have even been put in charge of the
> > > > > > president's re-election.  And remember Treasury Secretary
> > > > > > Mellon's advice to Herbert Hoover after the 1929 stock market
> > > > > > crash.
> > > > > >
> > > > > > There is no question the BOG has at times made a mess with its
> > > > > > monetary policy decisions.  But that is not sufficient reason to
> > > > > > turn monetary policy over to the politicians.  The selection of
> > > > > > highly qualified and principled candidates for the BOG is
> > > > > > responsibility of the politicians.  If they can't or don't do
so,
> > > > > > why should we assume the situation would improve if the
> > > > > > politicians took direct control?  That smacks of the greener
> > > > > > pasture syndrome.
> > > > > >
> > > > > > It is important that the BOG be fairly well insulated from the
> > > > > > political fortunes of the elected officials.  For much the same
> > > > > > reason, Federal court officials should be fairly well insulated
> > > > > > from the political arena.  The fact that they both are is a real
> > > > > > strength of the US system.
> > > > > >
> > > > > > >The core of the Federal Reserve's political base is the
> commercial
> > > > > > >banks.
> > > > > >
> > > > > > This is nonsense.  If the seven members of the BOG, including
the
> > > > > > chairman, have a political constituency, it is to those who
> > > > > > appoint and confirm them.  Ultimately it is to the Congress that
> > > > > > created the Fed and who the BOG must report to.  Yes, commercial
> > > > > > banks have the ear of the presidents of the Fed banks.  But
those
> > > > > > presidents do not speak with one voice, nor are they the primary
> > > > > > policy makers of the Fed.
> > > > > >
> > > > > > Your lengthy discussion of Volcker and the volatile interest
rate
> > > > > > of the 1980-1982 period was quite off the mark when you said the
> > > > > > Fed engaged in an "exercise in creative uncertainty to disrupt
> > > > > > the financial markets about interest rate stability."  It is
> > > > > > increasingly apparent that your extreme dislike of the Fed and
> > > > > > its role in monetary policy is getting in the way of a balanced
> > > > > > (rational?) view.
> > > > > >
> > > > > > Volcker's objective was to break the back of the wage-price
> > > > > > spiral that had been building throughout the 1970s.  That could
> > > > > > be done by with a big increase in interest rates alone.  It
> > > > > > didn't require high volatility in rates.  For political cover,
> > > > > > Volcker operated under the monetarist prescription of
controlling
> > > > > > the growth rate of the  money supply.  Of course that was
> > > > > > impossible, and the volatility in the Fed funds rate was a
> > > > > > natural result.
> > > > > >
> > > > > > William F Hummel
> > > > >
> > > > >
> > >
> > >