Former Treasury Secretary Summers Calls For End Of Fed Independence

At an event in Davos, Switzerland earlier today, Former U.S. Treasury Secretary, Larry Summers, argued that Central Bank independence from national governments should be scrapped in favor of a coordinated effort between politicians, central bankers and treasury to engineer inflation.  Seems reasonable, right?...what could possibly go wrong?

According to Market Watch, Summers argued that Central Bank independence came from "an understanding of the macroeconomic policy problem that is not relevant to current times."  Ironically, he argued that Central Bank "insulation" was required in the 70s/80s when the "White House" and "Congress" could not be trusted to fight inflation. 

So does this indicate that Summers' baseline assumption is that politicians today are more trustworthy than in the 70s/80s?  Perhaps Summers is the one that is "insulated" from reality?  Is it possible that he's completely missed the fact that one of our presidential candidates is currently under multiple investigations by the FBI for various allegations of corruption and fraud?  Meanwhile, both presidential candidates are polling at among the lowest rates ever experienced for "trustworthiness" while the job approval rating of Congress has never been lower...but sure, we should grant them even more power to wreak havoc on the U.S. economy for political gain...why not?

Central bank independence “comes from an understanding of the macroeconomic policy problem that is not relevant to current times,” Summers said in a speech at the International Monetary Fund.

 

Central bank insulation was needed in the 1970s and 1980s to combat inflation, Summers said. That’s because the White House and Congress sometimes saw the short-run benefits of unexpected inflation, while the Fed kept its eyes on the long-run costs, he said.

 

But that was yesterday’s problem, Summers said. The economy now faces secular stagnation, or a chronic lack of demand.

 

To fight this, the Treasury should be issuing bonds with long maturities taking advantage of current ultra-low interest rates, Summers said. And the Fed should try not get in the way.

Summers

 

Apparently Summers is under the impression that inflation will never again be an issue in the United States and therefore sees little harm in granting politicians the keys to the financial market rigging machine known as the Fed.

In the immediate aftermath of the financial crisis, the Treasury and the Fed often worked at cross purposes. he said. While government spending was rising and the Treasury was selling debt, the Fed was moving in the opposite direction, buying bonds though quantitative easing program for the purpose of shortening the maturity structure to provide stimulus.

 

In the future, Summers said the two agencies should cooperate to make sure the full benefits of the stimulus reach the economy.

 

Summers said he was aware that market experts would be leery of such cooperation between the fiscal authority and the central bank out of a concern that inflation may jump.

 

“I regard that as a virtue, rather than a vice, of the suggestion that I am making in our current environment,” the former Treasury secretary said.

Of course, the White House and it's political appointees would never try to exploit their power for political gain, right?

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