Tags: congress | fed | gertler

Gertler: Keep Congress Out of the Fed

Monday, 20 Jul 2009 11:55 AM

By Michael Kling

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Hands off the Fed, warns Mark Gertler, a professor of economics at New York University. Meddling politicians risk to doing permanent damage to the Fed, he warns.

Congressmen and others wanting to control the Fed should examine its early 1980s era under Paul Volcker, Gertler argues in a Financial Times editorial.

Upset at Volcker’s inflation-fighting high interest rates, Congressmen suggested limiting the Fed’s independence.

But the chairman stood firm against political pressure and defeated inflation, ushering in a new era of prosperity.

Although somewhat different and more complicated, the situation is much the same, Gertler points out.

In the biggest difference, the Fed has lent directly to private companies, a questionable act in normal times but necessary in a crisis. Simply put, there was no alternative, Gertler states.

The short-term nominal interest rate is near zero, so cutting rates won’t help. And buying long-term government debt won’t make a difference because the Treasury market is just too big.

Instead of applying political pressure, Gertler argues, Congress should reform financial regulations and give the Fed the power to monitor risk-taking.

A petition signed by over 380 economists is urging Congress and the Executive Branch to keep their hands off the Fed.

“The independence of U.S. monetary policy is at risk,” the petition states.

Messing with the Fed, the petition says, “could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery.”

Eight economists, including former Fed Governor Frederic Mishkin, started the petition.

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