The Troubling Loss of Fed Independence

Back in mid-March, economist Judy Shelton wrote an editorial in the Wall Street Journal entitled, "Is Inflation Baked Into the Budget Plan?"

I'll write about the main focus of her article in another post. For today, though, I'd like to quote this passage from Ms. Shelton's piece,

"The notion that monetary policy might be in cahoots with fiscal policy is sure to elicit howls of protest all the way from the Treasury to the Federal Reserve -- about a mile's distance. But no one can seriously suggest that the Fed has not been politicized beyond all pretenses toward independence. The Fed has become a key player in the government's efforts to deal with the credit crisis, purchasing hundreds of billions in mortgage-backed securities guaranteed by federal agencies and taking them onto its own balance sheet. Last month the Fed issued a joint statement with Treasury that they stood ready to inject more capital into banks "to provide a cushion against larger-than-expected future losses." And according to yesterday's surprise announcement, the Fed now plans to buy up long-term Treasury bonds -- an act of fiscal incest -- while taking another $1 trillion or so onto its balance sheet to boost consumer spending.

So the Fed is involved up to its neck in this blueprint for the future. Does anyone doubt that former Treasury Secretary Larry Summers, who heads the White House's Economic Council, is slated to be the next Fed chairman?"

The picture accompanying this post ought to give everybody pause. Surely former Fed Chairman William McChesney Martin is spinning in his grave.

I recall in my youth the general awareness that then-Fed Chairman Artie Burns was easily bullied into flooding the economy with liquidity in advance of Johnson's and Nixon's re-elections. That was a very bad time for the US dollar.

Seeing helicopter Ben at the same table with members of the current administration, especially the Treasury Secretary, gives me chills.

As Ms. Shelton wrote in the rest of her editorial, the current stimulus package and operating budget of the US government all but guarantee inflation coming soon. Rather than offset such huge doses of Treasury- and Congressionally-provided liquidity, the Fed is abetting them by purchasing US debt and other, private debt, thus adding to the flood of dollars in the global economy.

We just might come to a point where we'd fondly wish for the inflation rates of the Carter era.