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: My time has expired, and I’ll recognize the gentleman from Texas for five minutes.
Ron Paul: Thank you, Mr. Chairman. Sometimes definition of the words are pretty important, and I alluded to that in my opening statement about what “independence” might mean to others. For me independence usually is a code word for secret; sowe can’t get the information. But one of your arguments for the independence of the Fed or the secrecy of the Fed is that those central banks that do have independence and are less monitored in public, tend to have lower and more stable rates of interest.
But how can you compare that to what we’ve noticed under the Federal Reserve? I remember when I first started looking at what the Federal Reserve was doing we had an interest rate of 21%, that sort of got my attention. And today we have interest rates of less than 1%. So that is hardly stable, and to me the real mischief comes not only because they’re unstable and they fluctuate radically, but also the mischief it causes because these are artificial.
I’m a believer that interest rates, like prices, should be set by the marketplace. And control of prices and wages is the most serious abuse you can put on to an economy, and yet this fixing of prices seems to give us this trouble. And just a few months ago even the Secretary of the Treasury now, Mr. Geithner, recognized that during the time he was in the Fed, the Fed kept interest rates way too low for way to long. So, how can you defend the Fed maintaining independence or secrecy in order to maintain stable rates and to even try to achieve a stable economy, which obviously nobody argues we have a stable economy?
Donald Kohn: Sir, I do not equate independence with secrecy. In fact, I agree with the underlying premise I think of your question, which is independence and secrecy in a democratic society are antithetical. And I think the Federal Reserve has been quite transparent and has become much more transparent under Chairman Bernanke about what we’re doing and why we’re doing it. And I think we can retain our independence and you’re ability to trust what we’re doing only by explaining to you what we’re doing and why we’re doing it. We have not only the statements – which you mentioned in your opening statement – after every meeting explaining what we did and why we did it, we have limits, you have hearings, there are monetary policy reports, there are other hearings that you hold. But I think there are many, many opportunities for us to explain why we’re doing what we’re doing. And those opportunities and that transparency is absolutely essential for retaining our independence.
Ron Paul: Okay. But I still think we can do better. Like I mentioned early on, there was a time when the Fed did not reveal immediately what their targets were. Why can’t we consider releasing the details in five weeks instead of in five years? What’s the big deal that you have to have this information? And the other argument used is that it’s in the public’s interest. And that one really baffles me. The public is served by you having more information that we don’t have access to for maybe five years?
It seems like there’s other interests that allows this suspicion to build. Whose interest are you really protecting, because you say it’s the public’s interests I don’t think reassures a lot of people because all of a sudden we think, “What are you doing? Are you protecting the bankers’ interest, are you protecting some international government, another central bank or what?” So I don’t see how you can protect the public’s interest. It seems like we in the Congress should have the responsibility for protecting the public’s interest by knowing more about what you are doing.
Donald Kohn: Within three weeks, Congressman, we release minutes of our meeting which give detailed explanations of why we did what we did, including the argument back and forth, the minority opinion if people disagree. I think releasing… I think you’re talking about transcripts. We release them after 5 years. I would be very concerned that releasing those transcripts earlier would inhibit debate. I think it’s in the public’s interest that we have an unfettered debate within the open market committee that we are able to speculate among ourselves, “What if we did this, what if we did that? Where are things going?”, that there be no inhibitions on the back and forth within the open market committee.
Frankly, I’ve been at the Federal Reserve for several decades now, and in my view publishing the transcripts themselves have had a somewhat inhibiting effect on the way the debate is carried out. There are many more prepared statements read at the open market committee meetings now than was before the transcripts were published. I would be very hesitant, people would be very worried if their remarks were going to be made public very, very quickly. They’d be very worried about what they would say and they would be much more careful about what they’re saying, and that is not in the public interest, provided we’re willing to explain to you, as we are, why we did what we did and what the minority’s views are. And we do do that.
Ron Paul: Of course, you know, without an audit we never know. It just seems that it would be the benefit to us to know what the detailed discussions are. Why is there any barrier, I just don’t quite agree with that. Because it’s really the discussion that we have. Like I made my point in the other statement, this is after the fact, this is after you’ve had your meeting, it’s after you’ve done something. And also the more information the market gets, the better the market operates. And if they know what you’re thinking about and what you’re planning, five years for the minutes is really way too long.
Mel Watt: The gentleman’s time has expired, but the witness may answer.
Donald Kohn: Well, I think we do explain what we’re doing and why we’re thinking what we’re thinking within three weeks. And you have ample opportunity to question Chairman Bernanke when he comes up for hearings about why he is doing what he is doing. We would be glad to work with you on your ideas about how we could be more transparent and more helpful. I agree with you that for the most part, transparency where it doesn’t inhibit debate and the exchange of ideas, is better for the public. And we have taken huge steps in that direction over the past three years.