Later today, when the Senate votes on the nomination of Janet Yellen to replace Ben Bernanke as Chairman of the Federal Reserve, Republicans will have an opportunity to shed the image of stubborn allies of Wall Street and stand with the free market. Republicans should oppose the confirmation of Janet Yellen, who has been known to support Bernanke’s aggressive stimulus policies at the Federal Open Market Committee (FOMC), unless Democrats agree to some critical reforms of this powerful institution.
There is something fundamentally wrong when the Chairman of the Federal Reserve can serve as essentially an unelected fourth branch of government, wielding power over our purchases, savings, and national debt. During her confirmation hearing, Yellen declined to say how long she plans to keep interest rates so artificially low. She also failed to answer how and when she plans to sell off the Fed’s huge balance sheet, which has quadrupled since 2008. Most disturbingly, she obdurately rejected any plan to inject congressional oversight into this unaccountable and unelected creation of Congress. This is simply irresponsible.
We have a prime opportunity to hold the Fed and their special interests’ feet to the fire over their manipulation and dangerous economic game of distorting our economy.
It’s never good to make abrupt and drastic changes in monetary policy, but we must not be dissuaded from proposing reforms just because the stock market will have a tantrum – the same repetitive threat that is used to force Congress to raise the debt ceiling. Republicans need to begin advocating for the repeal of Humphrey-Hawkins, which charges the Fed with a dual mandate to achieve maximum sustainable employment and keep prices stable. The Fed should focus solely on price stability. Once they lack the ability to administer to Wall Street what the Dallas Fed Chair Richard Fisher refers to as “monetary morphine,” there won’t be any wild swings in the stock market in anticipation of such harmful meddling.
After three rounds of ‘quantitative easing’ and two rounds of ‘operation twist,’ the Fed has a balance sheet of almost $4 trillion — purchasing $40 billion in treasuries and $45 billion in mortgage-backed securities per month. The governing body of the Fed has not offered any comprehensive plan to sell off these assets without incurring a loss. The endless bond buying is distorting the housing market, yet Washington politicians seem to have forgotten the tough lessons learned from the previous housing bubble and continue to allow it to happen.
Additionally, the perennial policy of keeping interest rates near zero is hurting retirees all for the purpose of putting a short-term band-aid on the ailing economy. It’s almost impossible for seniors to find low-risk investments that will allow their savings to keep up with the rate of inflation. A new report from the McKinsey Global Institute shows that households lost $360 billion in net interest income from the monetary manipulation, with seniors losing roughly $2700 per year. Also, record-low interest rates have incentivized banks to sit on their money and not offer loans to startup businesses, exacerbating the existing tightness in the credit market due to Dodd-Frank.
The artificially low interest rates have done nothing to spawn organic growth in the economy, except for juicing up the stock market in the short-run, benefiting the special interest corporatists at the expense of the people.
To make matters worse, the ability of the Federal Reserve to service the national debt with artificially low interest rates on treasuries has allowed the Obama administration to grow harmful government programs like Obamacare. If government expenditures would be limited to the amount of tax revenue, it would be much harder for liberals to expand the role of government in private enterprise. Each increase in spending would require a commensurate increase in taxes.
However, the Federal Reserve’s unbridled power to manipulate the treasury market has allowed them to grow government on credit – and do so relatively cheaply. At present, the Federal Reserve’s scheme of near-zero interest rates has kept the interest payments on the debt to below $240 billion per year. According to Investors’ Business Daily, “If Washington had to pay the average interest now that it paid in 2000 (6.4%), it would be paying $500 billion more each year to stay afloat.” Hence, the Federal Reserve is helping obfuscate the pain from growing government by temporarily lowering the cost of borrowing.
For once, the Republican Party must not be afraid to cut its ties to Wall Street and oppose an interventionist nominee to the Fed. Along with Obamacare, the fight for reform of the Federal Reserve will go a long way in rehabilitating the party’s image as a warrior of free market populism. Sadly, Democrats have enough votes to confirm Janet Yellen. But that confirmation should be over the votes of a unified opposition from the GOP.
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