In an article describing the Federal Reserve System, the author comes to this conclusion:
Oh, you want power rankings? I’d put the Fed chair at the second most powerful person in the United States. The president comes first. But consider the alternatives for the No. 2 slot: The vice president’s only formal power is to break ties in the Senate; the president can choose to ignore and marginalize him. High Cabinet officials like the secretaries of state and defense take their orders from, and serve at the pleasure of, the president. Similarly, you could make a case for White House chief of staff, but that position is basically a vessel for carrying out the president’s wishes. The chief justice of the Supreme Court is both powerful and independent, but is much more likely to be outvoted by peers than is the Fed chair.
I think this is correct.
The article also offers this bit of information: the FED employs 20,000 people. When you think of the FED as the #1 employment opportunity for Ph.D-holding economists, you can understand why economists outside the Austrian School Never criticize it as a government-created cartel, which by all textbook standards of cartels, it clearly is.
Then there is the hierarchy of power. Does the President control the FED? The article says no. This is correct. Does Congress control the FED? The article says no.
Congress can yell at them to do this or that (indeed, legally the Fed chair must go before Congress at least twice a year, and in practice it’s usually more often than that). But Congress can’t fire them, either.
And unlike most agencies, Congress can’t even mess with the Fed by threatening to withhold funding. Printing money, as it turns out, is a profitable business, so the Fed pays its operating expenses — buildings, salaries, and so on — out of those earnings, and then refunds whatever is left over to Congress. So the Fed helps fund Congress, not the other way around.
This is correct.
The article praises the FED’s independence from all political control. All textbooks do. All mainstream media articles do. This is assumed.
The reason for that insulation is that the job the Fed has to do is complex (do you really want to trust Congress to decide how to calculate capital levels for giant banks?) and benefits from being separate from politics. A president typically has every incentive to encourage low interest rates in the run-up to an election, for instance, even though it could come at the cost of unpleasant and self-defeating inflation over the long run. Independence cuts both ways, though! In recent years, the Bernanke Fed has shown a willingness to move toward easier monetary policy, even over the objections of many congressional Republicans.
No Establishment author comes out and says this: “The Federal Reserve System possesses complete federal sovereignty, yet is beyond the power of any branch of government. It is legally more independent than the CIA. This is a great thing. Democracy has its limits, and should not be defended as a universally legitimate system of government.” This is in fact what the entire American Establishment believes, but never, ever says in public. The Establishment says “independent, ” not “anti-democratic.” They figure that the rubes — voters — will not catch on. They assume correctly.
This is Bernanke’s FED, and has been from the beginning.
In theory, the chairman holds one of 12 votes to decide what those decisions ought to be. But in practice, he or she has much more influence than that would suggest. The chair sets the agenda — which issues in the economy are worthy of discussion and consideration and which aren’t. The chair oversees the staff members who prepare the forecasts on which the decisions are based. The chair determines who talks and when and for how long. As a matter of tradition, committee members don’t dissent unless they strongly disagree with the direction the rest of the committee is heading. Through the nearly eight years of the Bernanke chairmanship there have never been more than three dissenters at one meeting.
Given the fact that this article appeared in the second most influential U.S. newspaper, one that is located inside the Washington Beltway, and is basically introductory, we get some indication of how few people know what the FED is, even in Washington, D.C. This is another reason for its enormous power . . . and has been ever since it opened its doors in 1914.