We Don’t Need to Kill the Federal Reserve, We Need a BETTER Federal Reserve

Ron Paul is famous for bemoaning (“be-whining?”) the control the Federal Reserve has over the economy and has committed to ending the Federal Reserve if he’s elected President.  Of course he will never be elected President.  Overt racists haven’t held the Presidency since Wilson (although Nixon was certainly a closet racist, as was Saint Reagan).  But I digress.  Ron Paul will not be President.  And even if he were elected President in some fantasy bizzaro world where Spock has a goatee, his threats to end the Fed are just that.  Threats.  He could no more end the Federal Reserve System than he could get elected President.  QED.

But that’s not my point.  My point isn’t that we need to end the Fed, we need to reform the Fed.  The Federal Reserve has two explicit charters.  First, to control inflation.  Second, to ensure full employment.  Depending on how the Fed manages monetary policy, the can privilege one or the other or try and balance between the two.  Lately, it’s been much more about the fear of inflation instead of the high levels of unemployment.

The first step in the policy process is for policymakers to be aware that there’s a problem in the economy, and access to reliable, timely, and informative data is critical.

Prior to the crisis, policymakers were not asking the right questions and hence saw no need to collect such data, or to believe what the data they did have was telling them. They did not believe a severe financial meltdown was possible in modern economies featuring modern policy tools –those problems had been overcome long ago – so they hardly bothered to look for signs of bubble trouble. They are beginning to bring these measures into play now, and seem to have a better understanding of their importance, but only time will tell if they’ve truly learned their lesson.

The Federal Reserve Board was suffering from selection bias; they were not asking the right questions of their data or they simply were not collecting the right data to predict the consequences of their decisions.  Therefore, the answers they got were within the bounds of their bias.

We need the Fed to start managing to both parts of their charter.


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