Thursday, November 15, 2007

Inflation is Up; But Some in Congress Couldn't Care Less

Amazing how some politicians really don't have a clue.

They themselves created a semi-independent entity (the Federal Reserve) to maintain stable prices and a steady economy through control of the money supply and supervision of the banking industry.

Meanwhile, the same legislators are screaming and yelling for that entity to ignore prices, create asset bubbles, and throw our financial industry into complete disarray. To hell with those poor mortgaged schmucks who somehow got themselves plucked like a chicken.

featherless chicken
[Thanks to for the photo.]

What is Congress griping about?

The Federal Reserve has just announced that it will make an effort to become even more transparent. This means that they will try to communicate clearly with the public, so that the marketplace can learn of probable future Fed actions without having to speculate about them. And hopefully, the Fed is serious and not just jawboning as usual.

This is laudable. Industries around the world are spending millions of dollars trying to invent the perfect crystal ball, one that will tell them what the US Fed is going to do with America's interest rates and money supply.

Unfortunately, in the past the Fed has been less than translucent about their reasoning and tactics. (See my cartoon about former Fed Chairman Alan Greenspan's infamous linguistic obscurity.) This obfuscation makes for market confusion and wasteful hedging of risk on the part of all who depend upon a reasonably constant supply of credit at their bank (i.e. most of the world's companies).

Up to now, the Fed has analyzed a lot of data behind closed doors and then has made some seemingly haphazard decisions about which tactic to apply. (One Fed governor, Mishkin, calls it the "art" of central banking, rather than a science.)

The theory behind the Fed's scheming seems to have been that the public should simply have faith in their central bankers; that they shouldn't worry their pretty little heads, and should just go about their business as though everything is under control.

The only problem is that the market players are not stupid. They know that everything is not under control, and that the Fed doesn't have a real handle on the economy, employment, or even the money supply--hence the industrial scrambling to keep from finding themselves behind the fiscal eight ball.

But over the last few months, the Fed has realized the folly of its former ways and begun openly to admit its shortcomings. According to this article in the Financial Times, they will soon "adopt many of the features of an inflation-targeting regime, while stopping short of stating a formal inflation target. The US central bank said it would start publishing more frequent, more detailed and longer-range economic forecasts, including its first forecasts for 'headline' inflation which includes volatile food and energy costs." This would "provide investors with greater clarity about its intentions."

This is really fabulous news for everyone.

So guess who is against this step into the more transparent, more egalitarian 21st century? Why Congress, of course.

According to the FT, the Fed "stopped short [of actually adopting an inflation target] ... for fear of sparking a fight with opponents of such a move in Congress, who suspect that a target would make the Fed more concerned about inflation than growth."

But what's wrong with this picture? One of the principal reasons for the Fed's existence is to control inflation and to avoid the damages it wreaks on an economy:

- Loss of purchasing power of all people on all economic levels including the poorest;

- Dollar devaluation with the consequent increase of import prices;

- Asset bubbles, like boom/busts, housing boom/busts, and the wasteful speculation that they sustain; and eventually

- Loss of jobs and possible recession.

But isn't that exactly what the Congress created the Fed to do?

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