Fed Independence Ain't What It Used to Be

" This is Decatur daily podcast for Friday November 20 2009. And give the brown escaping the inflation that likely awaits the United States money supply will be costly. It will mean public support a Federal Reserve focused on the long term. And the willingness of politicians to accept inevitable political consequences sooner rather than later. Allan Meltzer professor of political economy at Carnegie Mellon University. Says history won't look kindly on the United States without significant changes to make the Federal Reserve and congress credible once again. Expo following his talk -- Tito's 27 annual monetary conference held yesterday."

" Is it possible for the Fed it to. Rise above politics and do what you think needs to be done well walker was able to doing but it requires public support. And deserve democracy in congress has a lot of influence on what the Fed does mean the Fed as the agent of congress. So it's not independent in the sense of the European central bankers independent. That is there is no congressman has direct control of the European Central Bank. There is a congress and they have the authority to -- money. And regulate the value thereof under the constitution. And the Fed is that delegated authority shall -- has to be concerned or congress drugs and it's."

" You talked about this. Changing definition of fed independence. What do you think it ought to mean and what does it mean."

" What you ought to mean is that there's a rule. For monetary policy and the fairness to stay within that rule and if they don't stay within the rule they have to offer their resignations. Or an explanation of why they've violated. Deviated from the rule many central banks to that basically that's what the Bank of England now does. It's -- recommended that early on to the New Zealand. Reserve bank one of the first thanks to adopt monetary targeting improved on what I recommended to them but they then -- and we negotiate. We've touched with a minister of finance we agree on inflation target if we don't hit the inflation target we have to resign."

" The stakes seem to be pretty high and getting public support I guess would be akin in some sense to getting public support for any giants. Undertaking for you right here history does not record any examples of countries that face time money growth -- growing budget deficits and a depreciating currency that escaped inflation. The only real example you cite is the United States and early eighties."

" Yes they -- our other examples of countries which as in the 1980 exchange policy. And it took a few years to get people commenced the policy really changed but then things are substantially better there are other examples of countries that have. Revised about the time that the United States abandoned its inflationary policy. Many countries in the world in the money country in the world abandoned their policies and avoided. High inflation."

" How applicable is that Taylor rule to the extraordinary circumstances that we've had recently it seems like the Taylor rule is something that works pretty well when things are working pretty well."

" Yes I mean when we're in. I mean what we have to do now is obvious and we don't need a rule to get back to stability. We need to cut the deficit which means we have to cut spending. Considerable amount and that's hard to do. -- you know the last two administrations. Greatly increase the unfunded liabilities in Medicare. The Bush Administration was -- drug bill the Obama administration with a child care bill which is gonna vastly increased long --"

" you said one would have to be a cock eyed optimists in order to believe stats congress will cut 500 billion dollars out of Medicare. Why is it that we never seat. Those realities. In CBO projections."

" CBO is not supposed to do that CBO is supposed to say. This is what you sure you're going to do and we'll evaluate it. We won't tell you that you're not likely to do it touched on our responsibility. And in fact were barred by law. From telling congress what it should do so she BO. Is an accounting agency. A good one. And it does its job faithfully and well. But it's not supposed to lose to do things like say you're you're not gonna cut 500 billion dollars even though you -- you do you think there's."

" Any will within. The White House or within congress to do what you say needs to be done with regard to. Cutting the deficit and and getting us back to a reasonable supply of money."

" Well I've talked to a Chinese and often they've talked to me enough so I know them. President Obama gonna near full of hunt deficits when he was in China and he may feel. More encouraged to do something about that but you know it's not an easy thing to do. The only thing that could possibly be done. Is to have a bipartisan commission. That would. Come up with a proposal the -- the Greenspan Commission did -- the base closing commission did in the way we do. Trade rules tariff cuts. Congress -- voted up -- vote it down but can't change the details and then our partisans sure that neither party can claim that. They didn't agree York. Whatever -- us should do politicize it -- actually -- can do but most of the cuts are gonna have to come and health care spending. And that's something we're doing the opposite right now."

" Jury Driscoll is a senior fellow here at the -- has a different. He said that basically from here on outs. We've seen sort of a fusing of China and the United States in terms of our economic. Interdependence and from here on out he sees it very likely that the US will have to coordinate its. Economic policies would Beijing."

" I don't see that happening -- Is certainly true that we depend -- the Chinese to finance the deficit but that's the decisions made in China and we can influence."

" Allan Meltzer is professor of political economy at Carnegie Mellon University. He spoke of the Cato institute's 27 annual monetary conference. You can watch or listen to the conference archives at Cato dot sort."