Not surprisingly, his answer to the question in the
title of his paper is yes. He argues that the extraordinary actions that the
Fed felt it had to take to mitigate the economic consequences of the financial
crisis have increased the risk to the Fed’s independence in conducting monetary
policy. He is particularly concerned by the threat of subjecting the Fed’s
monetary policy to GAO “audit.” As he emphasized in his talk, “audit” in this
context does not mean verifying financial reports but evaluating the effectiveness
of Fed monetary policy by a Congressional agency. He admits that a GAO audit
would not be catastrophic; the Fed, after all, could ignore GAO recommendations
if it thought they were wrong. But he fears it would be a first step at eroding
Fed independence in monetary policy. He argued at the event that the best way
the Fed to prevent this is by following a successful monetary policy.
Christine Romer, who was the discussant of Kohn’s
paper, agreed with his conclusion but differed as to why the Fed’s independence
is being challenged. She argued that the reason is the current distrust of
experts, whether they are monetary economists or climate scientists. She said
that this distrust of experts is prevalent in part of the current Republican
Party.
As Kohn admits, though, part of the reason there is
a threat to Fed independence is that the Fed failed to prevent the financial
crisis. I would go further than that. The Fed Board staff and some of the
various research departments of the Federal Reserve Banks published papers
during the Greenspan era denying that there was a U.S. housing bubble. Perhaps
all that expertise was getting in the way of seeing what was perfectly obvious –
one just had to compare rents to housing prices and also realize that the rate
of increase in housing prices was unsustainable. Also, Chairman Greenspan
refused to take any regulatory action when then Fed Board member Ed Gramlich warned
him about problems with subprime mortgages.
With respect to the latter event, I would note that the
Fed is less independent with respect to regulation than it is with respect to monetary
policy. The Fed’s refusal to take regulatory action to address developing
problems in financial markets and at financial institutions during the period preceding
the financial crisis was not unique to the Fed.
I agree with both Kohn and Romer that the Fed’s
actions under Chairman Bernanke were generally correct, though one could argue
about particular actions or lack thereof (Lehman Brothers?). I also agree that
the Fed should be independent in monetary policy, though I would be less worried
about the GAO than Kohn. Interestingly, Peter Fisher, a former New York Fed
official and former Under Secretary of the Treasury, suggested at the
conference that he was less concerned than Kohn about the GAO in a question he
asked him.
While I support Fed independence, that does not mean
that the Fed should be insulated from criticism. Some of that criticism will no
doubt be well reasoned in the future, and the Fed should consider it. There is
a tendency at the Fed, which is apparent to those of us who have worked at
other agencies which have dealings with the Fed, for there to be a certain
amount of arrogance about their knowledge, wisdom, and abilities. Of course,
that does not mean that all Fed staffers come across that way, but enough do to
give that impression. There is, after all, a reason that William Greider chose
the title Secrets of the Temple for
his book about the Fed. In this respect, Bernanke has been good for the Fed.
While he undoubtedly is very smart, he does not come across as arrogant or as
someone who thinks he knows better than everyone else. He has also has
introduced much more transparency at the Fed, even giving press conferences after
FOMC meetings to explain Fed decisions.
As for Romer, while I agree that the attacks on
climate scientists is unwarranted, I think she would have to agree that there
is less consensus about monetary policy among economists than there is among climate
scientists about global warming and its causes. The climate change deniers
appear to be motivated by ideology; they have to deny that it is occurring because
the solutions require government action, which they oppose in principle.
Therefore, they are particularly subject to confirmation bias, grabbing any isolated
facts that might give rise to doubts (hey, the hurricane season in the North
Atlantic was less severe than predicted).
While debate about monetary policy is to an extent
fueled by ideology, there are legitimate differences among economists about
what the ultimate outcome of quantitative easing will be. At the conference,
Martin Feldstein, who served as Chairman of the Council of Economic Advisers in
the Reagan Administration, also spoke at the event and expressed concern about
quantitative easing. He would prefer, as everyone else who spoke on the subject
agreed, that fiscal policy take some of the pressure off the Fed. He favors more infrastructure spending in the
current situation, and departs from current Republican orthodoxy in supporting
this. I agree with him on this. More reliance on fiscal policy to mitigate the
aftermath of the financial crisis would have been preferable to exclusive
reliance on monetary policy after the initial, and too small, fiscal stimulus
program had run its course.
In his appearance, Bernanke mostly disagreed about
the concerns over quantitative easing. There is no settled consensus on this,
and debate is healthy while the Fed keeps it monetary policy independence.
