Is the Fed Still Constitutional?

The American Enterprise Instituteâ??s John Makinâ??â??Dr. Doom,â? to his numerous friendsâ??has a piece on the Federal Reserve Boardâ??s recently instigated â??QE3â? program that is bone-chilling even to regular Makin followers (including yours truly). In essence, QE3 is a â??whatever it takesâ? program to goose the economy with easy money. It may work if the Fed can stay ahead of inflation expectationsâ??that is, if bondholders are stupid and labor markets sticky. The sooner people catch on, the faster the Fed will have to double down. Eventually, it will have to close the spigotâ??manageable, perhaps, if the economy at that time shows robust growth; disastrous, if it is still in the doldrums. The Fed is making this fantastic gamble because (1) nothing else seems sufficient to revive sluggish growth and employment and (2) a much-noted article by an economist says that this might work.

 

I have no clue whether QE3 is a good or bad idea. I am quite confident, however, that the Fedâ??s aggressive course should and in due course will prompt political agitation over its institutional role and design. Alas, merely asking the question tends to bring out the lunatics on all sides (â??JFK was killed because he threatened the Fed!â? â??Attack on the New Deal, Constitution in Exile!â?) Perhaps, though,  there is still time for serious deliberation and debate.

 

Our fate hangs on the Fed; and yet, it is an independent institution, immunized from direct political pressures. In a democracy, operating under a Constitution that makes no explicit provision for a central bank and in many ways resists the creation of fourth or fifth branches of government, an independent Fed is an oddity. For what itâ??s worth, the Fedâ??s founders acknowledged the point: initially, the Secretary of the Treasury served as the institutionâ??s ex officio chairman. That arrangement was changed in the 1930s, after the Supreme Court had cleared the way for â??independentâ? agencies.

 

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