Kohn Warns Against Political Interference in Fed

By Alister Bull and Emily Kaiser, Reuters

WASHINGTON — Federal Reserve Vice Chairman Donald Kohn on Thursday launched a robust defense of the U.S. central bank’s independence and warned that efforts to put monetary policy under political sway would hurt the economy.

Curbing the Fed’s independence could both result in higher long-term interest rates and hurt the United States’ credit rating, Kohn said.

“Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation,” Kohn said in remarks prepared for delivery before a congressional committee.

Kohn is due to testify later on Thursday. A copy of his remarks was released before the hearing.

Kohn’s testimony comes as Congress debates President Barack Obama’s plan for regulatory reform, which envisions the Fed taking on the role of systemic risk regulator, in a bid to fix a system that failed to prevent a financial crisis last year.

The proposal to expand the Fed’s powers has increased calls for accountability at the central bank, and a bill put forward by Republican Congressman Ron Paul to expose it to a full audit by a government watchdog has won support from a majority in the House of Representatives.

Kohn said such a move could be highly detrimental.

“The bond rating agencies view operational independence of a country’s central bank as an important factor in determining sovereign credit ratings, suggesting that a threat to the Federal Reserve’s independence could lower the Treasury’s debt rating and thus raise its cost of borrowing,” he said.

Kohn said allowing that the Government Accountability Office to audit Fed monetary policy would be a bad mistake.

“The Federal Reserve strongly believes that removing the statutory limits on GAO audits of monetary policy matters would be contrary to the public interest by tending to undermine the independence and efficacy of monetary policy,” he said.

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By  Dr. Ron Paul, Goldseek

I have been very pleased with the progress of my legislation, HR 1207, which calls for a complete audit of the Federal Reserve and removes many significant barriers towards transparency of our monetary system. This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats.

Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well.  I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.

Some have begun to push back against this bill, and I am very happy to address their concerns.

The main argument seems to be that Congressional oversight over the Fed is government interference in the free market.  This argument shows a misunderstanding of what a free market really is.  Fundamentally, you cannot defend the Federal Reserve and the free market at the same time.  The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy.  In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market.  The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters. 

Instead, Congress has abdicated this responsibility to a cabal of elite, quasi-governmental banks who, instead of stabilizing the economy, have destabilized it. It took less than two decades for the Federal Reserve to bring on the Great Depression of the 1930’s.   It has also inflated away the value of our currency by over 96ince its inception.  It has invisibly stolen from the poor and given to the rich through this controlled inflation, and now openly stolen through recent bank bailouts.  It has predictably exacerbated the very problems it was meant to solve. 

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