[Congressional Record Volume 146, Number 97 (Monday, July 24, 2000)]
[House]
[Pages H6770-H6772]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




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

  The SPEAKER pro tempore (Mr. Kuykendall). Under the Speaker's 
announced policy of January 6, 1999, the gentleman from Washington (Mr. 
Metcalf) is recognized for 60 minutes.
  Mr. METCALF. Mr. Speaker, 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 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.

                              {time}  2100

  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. 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 the 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 the oversight off the hook; the Treasury does not rule 
the Fed; the White House does not rule the Fed; and this Congress does 
not fulfill its supervisory responsibility 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, and still quoting from Central Banking, ``the Feds 
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.''
  The Fed has not done too badly in some areas, as the economy 
demonstrates, most notably where inflation and interest rates today are 
resting. Whether they remain even close to where they are come a year 
or two from now may, indeed, be an altogether 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 United States 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 towards the long-range 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. More so than ever as the 
process of globalization continues to transform the world's economies.
  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 now I am quoting him again at length, 
``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 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 was passed, 
creating an unsustainable boom and reigniting inflationary pressures.''
  I am still quoting, ``Well, our 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 banks from the risks to which they were exposed to 
firms in the securities markets.
  ``Equally, this support signaled an extension of the central bank's 
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. 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 much the same fears 
expressed today, though quietly over lunch, by phone, by rumor, by 
investors and money managers throughout the United States.
  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 benefits.
  I am not entirely complaining, mind you. 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 benefit 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 the 
financial markets at will, manipulate the adjusted monetary base to 
even greater

[[Page H6771]]

 heights, or plummet to the depths; all this done toward long-term 
price stability. Has Greenspan so rejected Milton'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, wishing to become, each 
of them, another Bill Gates? Clearly, Greenspan 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. 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.''
  As Pringle goes on to State, ``Again European central bankers were 
annoyed at the lack of consultation. You do not need to be a populist 
politician to suspect that Wall Street was calling the shots, 
especially with former senior partner of Goldman Sachs, Robert Rubin, 
as U.S. Treasury Secretary.''
  One of the most important arguments regarding Greenspan's Fed's 
ability to save the world was put forward in this journal Central 
Banking, and I quote, ``The Fed's good record of achievement in 
controlling inflation over these years contrasts with its mixed record 
of market management. Its Achilles heel is moral hazard. It has not 
been so good at preventive medicine or in taking into account the long-
term effects of its actions on the behavior of governments and market 
participants.''
  It is precisely the long-term effects of Fed monetary policy that 
should concern Congress. If that is not our oversight role, what is? It 
is precisely the long-term effects on market participants that should 
concern Congress. If that is not our oversight role, what is? What are 
the long-term effects of Fed monetary policy going to be on government?
  Now, certainly Congress can get behind that question, if not in our 
oversight role on behalf of the American people generally, and the ill-
informed market participants that are creating this speculation bubble 
in the mistaken belief that the stock market no longer bears any risk, 
if not in their behalf, then maybe in our own congressional self-
interest.
  We have witnessed some rather disturbing policy stratagems in just 
the last, say, 10 months or so. Greenspan's Fed began around August and 
September of last year, 1999, to expand the money supply, the adjusted 
monetary base, from around $500 billion to nearly $625 billion, a $70 
billion run up, in anticipation of potential Y2K effects. This enormous 
expansion flowed directly into the 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 2000 
begins. There were no problems with Y2K. This spike downward lasted 
until around April of the year 2000. That is this year.
  We know the savage corrections the stock market displayed and that 
there were more losers than winners. All we ever hear about is the 
winners one sees, not the thousands or the millions of losers. Why do 
we hear so little about the losers in the media? Because, so the 
argument goes, the market returned to almost 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.
  One will not hear the White House complain. Only praise for Clinton's 
appointee shall be the sounding out, ringing out the bell in praise for 
White House management of the economy. One will not hear that from the 
very speculative bubble created during the last 6 months of 1999. One 
will not hear that from the quickest investor who took their profits 
before the inevitable downturn and before the downturn came and before 
the corrections that came.
  Investors were 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 that 
Clinton soberly explained was due to his wise leadership of the 
economy.
  If the surplus was really generated by wise leadership of the White 
House, why is not the government's debt going down? Do 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 FOMC brings only five voting Reserve Bank 
presidents, of which the New York bank is always one, leaving the 
Washington Governors in the majority. They run it. The influence of the 
chairman alone can sometimes be near to overwhelming.
  As an historical note, and I taught history and government, so 
forgive me, Congress insisted on scattering 12 regional Federal Reserve 
Banks across the country when the system was devised so that the east 
could not restrict credit elsewhere. Interestingly, these Federal 
Reserves 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 
Reserve Bank, a mix of representatives from small and large member 
banks in the district, as well as representatives from industry, 
commerce and the public.

                              {time}  2115

  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 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 the 
bankers, the 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 officials, together make government policy. 
Let me repeat 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. 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. 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.
  No one can any longer deny that the Federal Reserve System dominates 
the

[[Page H6772]]

U.S. economy; that its decisions, more than even so-called market 
forces, which is 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 future chairmen, that the chairman dominates the 
Board.
  This does not seem to concern this Congress, but history will record 
the result; and the people of America may not like that result. Our 
founders and our constitution carefully limited the power of the 
President and of the Congress, but now we have an unelected Board of 
Governors with power, for good or for mischief, immense power, over our 
national monetary policy.

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