Beating up on the Fed

Ron Paul, who clearly hates the Fed with a visceral passion, had some fiery stuff to say to Ben Bernanke yesterday:



Meanwhile, Bernanke seems to be getting rave reviews from global investors. Why is that? The easy money?

Hell if I'm equipped to make sense of whether the existence and operation of the Fed hurts the economy over the long term. But Megan's comment on central bank independence seems appealing:

Start with a stylized fact: in a democracy, there will be a strong tendency for monetary policy to favor debtors, because there generally more debtors than creditors. This is particularly true of America, with its lavish credit markets.

In the long run, however, strongly inflationary monetary policy makes everyone worse off; it impedes capital formation, lowering productivity.

Central bank independence works, not because the bankers aren't accountable to Congress (they are, after all, reappointed every so often), but because Congress is only weakly accountable for the actions of the central bank. If Congress were held to account for the actions of the central bank, Congress would appoint bankers who would do populist things that would make us all worse off. Most of the financial policy journalists I know have the sense that Congress actually supported most of what Paulson/Bernanke/Geithner did, but knew they did not dare enact it. They don't want a more accountable central bank.

So there is something magical about bank independence. It lets Congress cut against its basically populist political interests. You may think that makes it too bank-friendly. But it also means we don't have double-digit inflation, which is where we were headed before Volcker.