Dr. James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/ Business Relations and Professor of Government, LBJ School of Public Affairs, University of Texas – Testimony (pdf)
Event: Regulatory Restructuring: Balancing the Independence of the Federal Reserve in Monetary Policy with Systemic Risk Regulation
Venue: House Financial Service Committee’s Subcommittee on Domestic Monetary Policy and Technology
Mel Watt: I got to be out of here by 5 o’clock, there is another meeting then. I recognize the gentleman from Texas, Mr. Paul, for 5 minutes.
Ron Paul: I thank you, Mr. Chairman, and I welcome the panel, and it’s especially nice to see Dr. Meltzer here. I would like to start with a question to Dr. Meltzer because I want to follow up on his testimony about the Latin American crisis where he mentioned that the Federal Reserve went to the IMF and instructed the IMF to pay interest to those banks that were exposed.
And of course, that was without congressional permission and I think it makes a point, one of the points I’ve been trying to make, which is transparency of the Federal Reserve. It sounded to me like the majority here is for independence, which is a codeword for secrecy, and in opposition to transparency. And it’s always used for the public interest. Of course, I think the public interest is served by exposure and knowing what’s going on and whose interests are being served. And that’s why I would like to see a lot more transparency.
But the question I have for Dr. Meltzer is: Since he is aware of this and he has published this, is this a good reason for us to know a lot more about the agreements that the Federal Reserve makes because they can make agreements with international banking institutions and we have no right… we may have a right under the Constitution that we should, but we’ve given up that right, we’ve given up that privilege. Would this deal is good example of why we need to know more of what exactly the Federal Reserve is doing?
Dr. Allan Meltzer: Yes, let me begin by saying, independence to me, and I believe to many other members of the panel, does not mean lack of transparency; it means protection. The reason we have independent central banks is so that they don’t expand under pressure from Congress, from the administration, from the banking community and from others. We want them to be independent to make their judgment because they are obligated by law to maintain high employment and low inflation. Now, that law doesn’t work very well, at least in my opinion. But that’s why we want independence.
So transparency? How can you be against transparency? But I believe the Congress would be more effective in its over sight of the Federal Reserve if it concentrated much more on outcome and much less on process. Let them make their decisions the way they want to make them. Monitor the process. They are not living up to the mandate to maintain full employment or high employment and low inflation, and that’s what we should be concerned about.
Ron Paul: I thank you, and I’m going to hurry along because our 5 minutes run past rather quickly. But I wanted to ask Dr. Galbraith a question because he’s worked here and he knows the system, so I’ve been rather shocked with what he presented here. You actually talked about the Constitution and then you find out that you’re not supposed to do that around here. We don’t have that much concern about. So I was delighted from my viewpoint that you brought this up and reminded us about Henry Reuss‘ concern about the constitutionally of FOMC [Federal Open Market Committee]. And of course I agree with that.
But I wanted to see if there was a little bit more that you might agree with, because there are some who believe that we shouldn’t be doing anything unless it’s explicitly authorized. And, of course, the Central Bank is not authorized. It’s been ordained by the courts and the Congress, but it was never explicitly authorized.
But the more practical point I might be able to get your comment on is the concept of the budget. I mean, the Fed is a government onto itself. You know, they hire and make their wages, and it doesn’t go through the ordinary process. The Constitution says it should all go through the constitutional process. And also maybe may be you could comment on the foreign agreements; these are like treaties. The Federal Reserve goes and makes these agreements and they pass out money. Does this strike you that maybe that too might be challenged if you happen to come at this from a constitutional viewpoint?
Dr. James Galbraith: Well, I think under the Constitution the Congress has every right for whatever information it seeks from the Federal Reserve. And if the Congress were to decide to change the way the Federal Reserve is funded it also have a right to do that. It seems to me it would be an appropriate decision for Congress to make.
Ron Paul: So they would then have a right… so you would say that my proposal, that we find out more to find out what kind of agreements they’ve made with other governments, other central banks, international banking organization would be right and proper?
Dr. James Galbraith: My own view on this is that as a member of Congress you’re entitled to that information. That would be the position I understood be the case when I was working here 30 years ago.
Ron Paul: Thank you.