[Congressional Record Volume 146, Number 93 (Tuesday, July 18, 2000)]
[House]
[Pages H6450-H6451]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




FEDERAL RESERVE MONETARY POLICY: IS GREENSPAN'S FED THE WORLD'S CENTRAL 
                                 BANK?

  The SPEAKER pro tempore (Mr. Hunter). Under the Speaker's announced 
policy of January 6, 1999, the gentleman from Washington (Mr. Metcalf) 
is recognized for 30 minutes.
  Mr. METCALF. Mr. Speaker, the topic of my speech tonight is Federal 
Reserve monetary policy: Is Greenspan's Fed the world's Central Bank?
  Some years ago, William McDonough of the Federal Reserve Bank of New 
York stated the most important asset a central bank possesses is public 
confidence. He went on in that speech to note that, ``I am increasingly 
concerned that in a democracy a central bank can maintain price 
stability over the intermediate and long term only when it has public 
support for the necessary policies.''
  Public confidence here can only mean the confidence of the Members of 
Congress in our oversight capacity. Most of the American public, to 
this very day, have not the least interest in, awareness of, or 
knowledge of the Federal Reserve System, our central bank. But most 
Members feel that Allan Sproul, another former president of the New 
York Federal Reserve Bank, was quite correct in his letter, still 
quoted by Fed officials, that Fed independence does not mean 
independence from the government but independence within the 
government.

                              {time}  2015

  In performing its major task, the administration of monetary policy, 
the Federal Reserve System is an agency of the Congress, set up in a 
special form to bear the responsibility for that particular task which 
constitutionally belongs to the legislative branch of government.''
  Clearly, that form of argument appeals to most Members today. The 
construct is a masterpiece not just for being true, Congress did 
abdicate its enumerated powers, but for letting even those of us 
responsible for oversight off the hook: The Treasury does not rule the 
Fed, the White House does not rule the Fed, but this Congress does not 
write the script either.
  The current Fed chairman, Alan Greenspan, will soon testify before 
this House expressing his independence. As the journal Central Banking 
recently noted regarding the Fed, ``It has acquired an air of sanctity. 
Politicians hesitate to bait the Fed for fear of looking stupid.'' As a 
result, still quoting, ``the Fed's accountability is less than it 
appears. The Fed is always accountable in the sense that Congress could 
bring it to heel if it really wanted to.''
  And the Fed has not done too badly in some areas, as the economy 
demonstrates, most notably where inflation and interest rates are today 
resting. Whether they remain even close to where they are come a year 
or two from now may indeed be an all together different story.
  Mr. Greenspan has been pretty clear about what is now important in 
Fed policy. Let me quote from some past testimony: ``The Federal 
Reserve believes that the main contribution it can make to enhancing 
the long-term health of the U.S. economy is to promote price stability 
over time. Our short-run policy adjustments, while necessarily 
undertaken against the background of the current condition of the U.S. 
economy, must be consistent with moving toward the long-run goal of 
price stability.''
  The reality is that monetary policy can never put the economy exactly 
where Greenspan might want it to be. He knows full well that supply 
shocks that drive up prices suddenly, like the two major oil shocks of 
the 1970s, are always going to be with us, and more so than ever as the 
process of globalization continues to transform the world's economies. 
And the United States Federal Reserve is leading this global 
transformation. Some are quietly arguing, over lunch mostly, that 
Greenspan is in charge of what he may already believe to be the World 
Federal Reserve, the World Central Bank.
  There is good reason to suggest this. As Robert Pringle noted some 
time ago in Central Banking, ``Central banks, rather than governments, 
are laying down the rules of the game for the new international 
financial system. The Fed is in the lead.''
  Pringle went on to argue, and I am quoting him at length here, ``If 
the Fed's record during the debt crisis and in exchange rate management 
is mixed, most observers would give it full marks for the way it dealt 
with the stock market crash of October 1987. It is not clear that the 
verdict of history will be as favorable. After being prodded into 
action, some central banks, notably those of Japan and England, went on 
madly pumping money into the system long after the danger had passed, 
creating an unsustainable boom and reigniting inflationary pressures.
  ``Well, the Fed can hardly be blamed for that. The real problem was 
that Greenspan's action risked creating the expectation among investors 
that the Board of Governors would support U.S. stock markets in the 
future. Clearly, the action was prompted by the need to protect the 
banks from the risks to which they were exposed to firms in the 
securities markets.
  ``Equally, this support signalled an extension of the central banks' 
safety net to an area of the financial system where investors are 
traditionally expected to bear the risks themselves. It is no accident 
that after 1987 the bull market really took off, and it has never 
looked back.''
  I have quoted this section in the article by Robert Pringle that 
appeared in Central Banking because we are hearing the very same fears 
expressed today, though quietly, over lunch, by phone, by rumor, by 
investors and money managers throughout the U.S. Not too long ago 
former Fed chairman Paul Volker strongly suggested that our current 
boom is driven almost exclusively by the major international firms in 
the high-tech industry and the 40 industrials. Clearly, this is due to 
the fact that these few giant monopolies dominate the world market. 
Therefore, this boom reflects less what is happening here in America 
than what is going on in the world to these few monopolies' financial 
benefit.
  I am not entirely complaining. Where these few giant firms are 
concerned, some American workers do benefit. But more foreign workers 
benefit than American. More investors and owners benefit than workers; 
more very wealthy individuals than the middle class bedrock.
  My problem is that Greenspan's Fed seems to believe money does not 
matter; that we can create vast sums of cash and pump it into financial 
markets at will, manipulate the Adjusted Monetary Base to even greater 
height or plummet to the depths. All this is done toward long-term 
price stability? Has Greenspan so rejected Milton Friedman's theory 
that to do so one guarantees inflationary pressures in the road ahead 
along with savage corrections when actions become necessary by, once 
again, the same Fed?

  Can Greenspan seriously argue the Fed has not created the worst 
bubble in history; the worst speculation ever witnessed, with millions 
of day traders gambling their small fortunes on meek wills, wishing to 
become, each of them, another Bill Gates? Clearly, Greenspan has sent a 
signal once again to investors that the stock market bears no risk for 
the middle class citizen.
  During 1995, it was Mexico's turn again, and as Pringle pointed out, 
``The American administration panicked. Again, the Federal Reserve was 
there to help, even though there was less reason for central banks to 
get involved than in 1982, since there was less risk to the 
international banking system.''
  And as Pringle goes on to state, ``Again, European bankers were 
annoyed at the lack of consultation. You do not need to be a populist 
politician to expect that Wall Street was calling the shots, especially 
with former senior

[[Page H6451]]

partner of Goldman Sachs, Robert Rubin, as U.S. Treasury Secretary.''
  We have witnessed some rather disturbing policy stratagems in just, 
say the last 10 months or so. Greenspan's Fed began around August and 
September of last year to expand the money supply, the Adjusted 
Monetary Base, from around $500 billion to nearly $625 billion, a $70 
billion runup, in anticipation of potential Y2K effects. This enormous 
expansion flowed directly into financial markets and helped create the 
enormous boom in stock prices prior to that year's end. The speculation 
was seen primarily in high-tech stocks.
  Then comes the sudden and nearly precisely the same spike downward of 
the same Adjusted Monetary Base right after the year ends and year 2000 
begins. There are no problems with Y2K. This spike downward lasted 
until about April of the year 2000. We know the savage corrections the 
stock market displayed, and there were more losers than winners. All we 
ever hear about are the winners, not the thousands or millions of 
losers.
  And why do we hear so little about the losers in the media? Because, 
so the argument goes, the market returned almost to normal. The market 
bounced back, so the argument goes. Certainly, as the Fed began once 
again to pump up the monetary base around April. But the losers remain 
losers, and lost homes, businesses and bankruptcies continue to reach 
all-time highs; personal debt, especially credit card debt and equity 
finance debt, have reached unheard of levels. This is the speculation? 
No, let us call it what it really is: Gambling. This is the gambling 
that is today our U.S. stock market.
  We will not hear the White House complain. Only praise for Clinton's 
appointee shall be sounding out, ringing out the bell in praise for 
White House management of the economy. We will not hear that from the 
very speculative bubble created during the last 6 months of 1999. We 
will not hear that from the quickest investors, who took their profits 
before the inevitable downturn and before the corrections came.
  Investors paid handsomely for their gains in capital gains taxes 
levied. It is no surprise to Fed watchers that the taxes collected from 
capital gains nearly equaled the much-hailed government surplus, which 
Clinton soberly explained was due to his wise leadership of the 
economy. If the surplus was really generated by the wise leadership of 
the White House, why has the government's debt not been going down? And 
we should not confuse the government debt with some mythical balanced 
budget.
  For a Federal central bank, the concentration of power at the top is 
very marked. True, although the Board of Governors sets the discount 
rate and reserve requirements, the execution of monetary policy on an 
ongoing basis is decided by the larger 12-member Federal Open Market 
Committee. But the FMOC brings only five voting Reserve Bank 
presidents, to which the New York bank is always one, leaving the 
Washington governors in the majority. And the influence of the chairman 
alone can be sometimes near to overwhelming.
  On an historical note, and I taught history and government, so 
forgive me, Congress insisted on scattering 12 Federal Reserve banks 
across the country when the system was devised so the east could not 
restrict credit elsewhere. Interestingly, these regional Feds were 
chartered as private institutions in which local banks owned all the 
stock. That is still true today, with the outside directors on the 
board of a Federal Reserve a mix of representatives from small and 
large member banks in the district, as well as representatives from 
industry, commerce and the public.
  What was intended here was a sort of balancing; three bankers with 
six nonbankers on each Federal Reserve Board. Supposedly, this would 
put the lenders at a disadvantage to the borrowing classes, which would 
outnumber the lenders six to three. The boards choose the Federal 
Reserve Bank presidents, always from the lending class, but do so only 
with the approval of the seven-member Federal Reserve Board in 
Washington. Thus, we can readily see that bankers, lenders, clearly 
dominate the Federal Reserve System itself.
  Even though at the regional Feds the distinction I just made is 
superficially valid, many of the nonbank directors are tied 
inextricably to banking itself, or sit on separate boards of directors 
where bankers rest as well. Nor is the public sector category so clear. 
Many nonindustry participants on these boards have close ties to 
banking and banking's network of consultants, academics and financial 
management roles clearly bank related.
  Just how much power any one regional president has is still debated 
in inner circles. Previous efforts at restricting Reserve Bank 
presidents' powers have been dismissed on the grounds that their powers 
were a proper delegation of authority by Congress. Allowing that the 
Federal Reserve is a quasi-government agency, it remains the only 
government agency in which private individuals, along with government-
appointed individuals, together make government policy.
  I will repeat that. The only government agency in which private 
individuals, along with government-appointed individuals, together make 
government policy.
  It remains a solid fact that these regional bank presidents cast 
extremely important votes on public policies that in the present as 
well as the future affect the economic lives of every American.

                              {time}  2030

  Yet, and this is the point to my digression, they lack the public 
accountability because they lack the public legitimacy to be making 
these decisions, especially these kinds of decisions, some of whose 
recent effects I have just pointed out.
  Nobody can deny any longer that the Federal Reserve system dominates 
the U.S. economy, that its decisions, more than even so-called market 
forces, a sham notion under managed competition in any case, affect 
everybody's lives and well-being, that within the decision-making 
process delegated to the Federal Reserve, the Board of Governors 
clearly dominates the process, that within that Board of Governors, the 
chairman, and this is not intended to single out Mr. Greenspan but to 
apply to all past and present and future chairmen, that the chairman 
dominates the board.
  If all this does not concern this Congress, then history will record 
the result.

                          ____________________