Lapas attēli
PDF
ePub

Going back to the history of the Federal Reserve, when it was founded in 1913, nobody at that time had any idea that there was such a thing as Federal stabilization policy or demand management. Nobody thought the Federal Government had any responsibility for unemployment or prices or any macroeconomic variables. The Federal Reserve was conceived as a remedy for some financial panics that had plagued the country from time to time and for extending credit facilities to all regions of the country.

Even in 1935 when the present governing legislation of the Fed was adopted, nobody imagined that either the Federal Government in general or the Federal Reserve in particular had responsibility for the macroeconomic performance of the country.

I will call attention to a couple of issues that aren't addressed in the bill of Congressmen Hamilton and Dorgan. One already mentioned by Congressman Leach is the 14-year terms of the Governors. That's pretty long because that means there can be as few as two appointments in any Presidential term. The influence of past Presidents can live long after the Presidents themselves have gone. I would suggest thinking about reducing terms to 10 years and the number of the Board of Governors to 5.

As for the timing of the 4-year term of the Chairman, which is covered in H.R. 3512 nobody ever intended that the President should have to wait for 30 of the 48 months of a term before he could choose with the advice and consent of the Senate a Federal Reserve Chairman. That happens to be when Chairman McCabe resigned in 1951, and under the 1935 Act a new Chairman was always appointed for 4 years from the date of appointment and not to finish a fixed term.

The timing of the chairmanship just slipped then, and it could slip again one way or the other in a completely accidental and irrational way. I think it's a modest thing to do and high time to do it, to regularize the situation by making the term of the Chairman coincident with a 6-month or 1-year lag, with the term of the President.

The other topic I wanted to bring up, which is not in the bill before you, is the power of the presidents of the district banks. I consider that the major violation of principles of legitimate democracy. These men and women, and they are mostly fine people, participate in definitive votes on crucial policy questions without being either appointed by the President or confirmed by the Senate.

Under the setup of the Federal Reserve System, the kind of legal fiction that still prevails, the Federal Reserve banks are private corporations owned by the member banks of each district. The presidents of the banks are selected by the directors of the banks subject to approval by the Board in Washington. They are considered, certainly paid salaries as if they were private executives rather than Federal officials. I think that either they should be made into Federal officials and appointed the same way the Governors are and confirmed by the Senate or they shouldn't have votes on the FOMC. There are no two ways about it. If they are appointed the way they are now, then they might be allowed to attend FOMC meetings, but not to vote.

I do think it's important that the administration have the opportunity to explain its economic strategy and its outlook to the Fed

not just to the Chairman, but to the entire decisionmaking body of the Fed. After all, the President and his administration have in the minds of voters the ultimate responsibility to the Nation for economic performance.

Let me give you an example of what might be involved. Suppose that the President, with the cooperation of the Congress, some day decided to do something substantial about the chronic budget deficit. Suppose people said well, yes, but we're worried it might throw the country into a recession. I've heard that said in the present economic climate.

Then you say, yes, but the Fed could keep the country from being thrown into a recession if there was a coordinated timing of the fiscal reforms and the policy of the FOMC. That would require easing monetary policy so as to make up for the withdrawal of spending by taxpayers or by the Federal Government. Perhaps you couldn't get the budget correction agreed to unless there was concurrence between the Fed and the rest of the Government.

That's a big and timely example why coordination between the makers of fiscal policy and the makers of monetary policy is important. I mean coordination of what they are going to do, not just information about what is being done or what has been done.

For that reason I would personally go farther than the bill does. I think it's outrageous that there is no provision for systematic consultation between the governing body of the Fed and the major economic officials of the administration, the Treasury Secretary, the CEA Chairman, and the OMB Director. I think that consultation should occur more than three times a year, preferably at the time of every FOMC meeting.

If you don't want those guys to be present at the voting part of the FOMC meetings, well, they don't have to be there, but they would have had the chance to say what the administration's strategy is and to hear in return what the Fed's strategy is. It's a twoway street. To the extent that the fiscal policy or the administration's policy is an embarrassment to the makers of monetary policy, its officials should know that, too.

Let me mention also that there are some affairs in which there is inevitable overlap between the administration and the Fed. A particular example is the international financial relations of the Government which are in the hands of the Treasury. But if the Secretary of the Treasury agrees-with his counterparts in the Group of Seven for some range of the dollar exchange rate, his agreement means nothing unless the Fed is also on board to bring that about by its monetary policies. So there just has to be coordination in that respect, these international relationships are more and more important and more and more central to monetary policy.

I'm not concerned as much as many people are about the danger that politics might be involved in the decisions of monetary policy. I am reminded of the police chief in Casablanca, played by Claude Rains. He comes to the casino and pretends he's shocked to find there is gambling going on. Are you shocked to find that there is politics in relation to monetary policy and fiscal policy? These have to do with the most important economic decisions of the Govern

ment. There should be politics involved. That is the nature of representative democracy.

Consider the two biggest policy decisions of the Federal Reserve in the last 10 years. I'm not going to say whether those decisions were right or wrong. I happen to think that the Fed has, for the most part, done an excellent job of managing the economy since 1982 anyway. But never mind, the first big decision was in October 1979 when Paul Volcker and his colleagues decided to have a single-minded crusade against inflation. That brought unemployment up nearly to 11 percent and threw many firms and financial institutions into bankruptcy.

Then the second big decision was the decision to end the crusade and to turn the economy around in late 1982, to start recovery even though the inflation had not yet been reduced to zero. The Fed decided to declare victory and get out, as Senator Aiken recommended for the Vietnam War.

Those were policy choices of the utmost gravity for the United States and the world economy. It's hard to understand why they should be decided by the FOMC all by itself.

As I said, it's a two-way street, and if there had been more consultation about the mixture of fiscal and monetary policies in the early 1980's we might have had a more moderate fiscal policy and an easier and lower interest rate monetary policy with great advantage to the Nation.

Now I don't have any opinion about the GAO audits because I don't know enough about what the GAO does. I don't see any great objection to publication of the Federal Reserve budget. There is no great issue there either. I would interject, by the way, that the Federal Reserve Board of Governors does have a wonderful research operation, which is very important in producing data and analysis for the policy purposes of the Federal Reserve itself and for the economy and for the rest of the Government. The same is true of the Federal Reserve Banks. I would hate to see these research papers be victims of any budgetary squeeze on the Fed. I assume and hope that's not intended by the bill.

I'm not enthusiastic about the idea of announcing Federal Reserve decisions immediately after FOMC meetings. I notice that whenever there is a scheduled date for release of data—price data, interest rates or whatever-that the scheduled release becomes a focus of financial market speculation. That was true, for example, when the Federal Reserve was following monetary aggregate targets. The monetary aggregate data were then released on Friday afternoon. A lot of good manpower was being wasted in speculating on what that weekly announcement would be. I don't think that's a constructive way to go. I can readily imagine circumstances when it's good that the Federal Reserve leaves some uncertainty in the market as to what it's doing.

Let me turn for a moment to the chairman's H.J. Resolution 409. I regret to say I'm opposed to that, Mr. Chairman. The Fed is already subject to the mandates of the Employment Act of 1946 and of the Humphrey-Hawkins Act.

I must say that somebody might in the depths of a recession like 1981 or 1982 propose a resolution which says the Federal Reserve should have as a single criterion the restoration of 5 percent unem

ployment in 5 years. I think that would have been a bad idea, and I think this proposal is a bad idea, too.

For all practical purposes right now, the country has accepted Paul Volcker's 1982 provision to regard 4 or 5 percent inflation as if it were zero. The economy is well adjusted to that, and on that front things are going quite well. Unemployment has been brought down during the recovery that resulted, and we don't have signs of a resurgent spiral in inflation.

The Fed has done this by pragmatic balancing of objectives and by fine tuning in the last 7 years. I would let well enough alone. Lowering inflation to zero in 5 years would sacrifice some output and jobs. We don't know how much. But it would involve some recession perhaps as deep as that in 1981-82.

One thing to remember is that the country would enter a new period of disinflation of this kind with unprecedentedly large amounts of debt, private and public. Those debts were undertaken when interest rates reflected the higher 4 or 5 percent rate of inflation. It would be very burdensome to service those debts if inflation were quickly, as quickly as 5 years, reduced to zero.

There is an influential this abstract proposition in my field of economics that real economic outcomes, production, employment and other variables that really matter are independent of dollar price tags and their rates of change. That's why there is what I regard as overconfidence that it would be painless to reduce the rate of inflation. That same argument was made in 1979, but the disinflation turned out to be quite painful.

The proposition might indeed be true over a very long run. Suppose you could erase past history and start from scratch with free choice of your rate of inflation, whether zero or five or minus five or 10. It would make sense to say that the real results that matter won't depend very much at all on which inflation rate you choose. That's not the situation we are ever in, because we always have the overhang of the past.

Unexpected price shocks are another problem. In the 1970's we had two unprecedented supply shocks, oil supplies and prices in 1973-1974 and in 1979-1980. Suppose they come along again, or similar events. If you have promised to keep overall prices stable on average, then since some prices have gone up, the Fed has got to make all other prices go down. That's not easy to do. It might need a much longer time to absorb and offset those shocks. But that contingency is not provided for in a simple resolution of the kind we are discussing.

I do think the Federal Reserve has over the years successfully established the fact that it provides an anchor to the value of currency and will not accommodate in an open-ended unlimited way any degree of price inflation that might occur. It is partly because they have established that credibility that we can go along with the 4 or 5 percent inflation now and still have very high rates of business activity and low unemployment. This resolution is not necessary to establish the Fed's credibility. It's already there, I would be afraid of this resolution because opposing it as a proposal now or if it were adopted failing to meet its target would be misinterpreted as indications of softness with respect to inflation or adoption of inflation in policies.

24-020 - 90 - 2

Thank you, Mr. Chairman.

Chairman NEAL. Thank you, sir, very much.

[The prepared statement of Professor Tobin can be found in the appendix.]

Chairman NEAL. Mr. Gramley, if we would hear from you at this

time.

STATEMENT OF LYLE E. GRAMLEY, SENIOR STAFF VICE PRESIDENT AND CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION OF AMERICA

Mr. GRAMLEY. Thank you, Mr. Chairman.

I would like to begin with a brief discussion of how money and prices are related to one another because my judgment on that issue forms the basis for my opinions with regard to the two bills that are the subject of these hearings.

We all know that money and prices are related to one another, much more closely in the long run than in the short run. I subscribe to the view that in the long run what happens to the stock of money determines principally the level of prices and the rate of inflation and not the level or growth rate of real output.

The converse of that proposition appears to be equally valid, namely, that in the long run the principal determinant of the level of prices and the rate of inflation is the growth of the stock of money. Let me relate this theoretical proposition to reality with a concrete example.

Between the early 1960's and the late 1970's the U.S. economy went from price stability to double digit inflation. There were many contributing factors—such as the way in which the Vietnam War was financed, the suppression of actual inflation by mandatory wage price controls during the early 1970's when monetary and fiscal policies were both highly stimulative, and the two oil price shocks of 1973 and 1979.

However, none of those factors either alone or in combination would have led to double digit inflation if monetary policy had not been accommodative. The Federal Reserve tacitly acquiesced to higher inflation by permitting an excessively rapid growth of money and credit. The Federal Reserve put an end to the inflationary process or at least reduced it by adopting anti-inflation policies between 1979 and 1982. Had that been done much earlier, double digit inflation would have been avoided and the wrenching of the economy needed to bring inflation down during the 1980's would have been less severe also.

If monetary policy largely affects the level of prices and only the level of prices over the long run, then it would seem to make sense for the long-run objective of monetary policy to be the achievement of reasonable price stability, and that I believe is the Federal Reserve's present understanding of its principal role in economic stabilization policy.

recognize fully, and this is a point that Professor Tobin made, that monetary policy in the short run has significant effects on real output and employment, effects that must be taken into account carefully in the conduct of monetary policy.

« iepriekšējāTurpināt »