January 10, 2008
Thursday

Most of the important public-policy decisions in the country are now being made not in any public forum nor even by elected officials. They are being made in secret by unelected officials -- the Board of Governors of the Federal Reserve System.

While the governors are nominated by the president and appointed by the Senate, that is pretty much where accountability ends, since the governors serve 14-year terms, which is close to the life tenure of federal judges. There is a little more accountability for the board's chairman and vice chairman, who are nominated by the president from among the board's members and appointed by the Senate for four-year terms of leadership.

This structure is said to take politics out of the management of the money supply and interest rates. In practice it has only replaced public politics with private politics, and in regard to issues that have the greatest bearing on the country's prosperity and economic opportunity and equality or inequality. The president and Congress spend most of their time on issues far less relevant to daily life than the issues that have been forfeited to the Federal Reserve.

And look how the Fed is functioning amid the turmoil in the world financial system that has been prompted by the collapse in the market for "subprime" mortgage bonds.

As it always does in crisis, the Fed has responded with secret meetings and telephone conferences with the great financial houses, deciding in secret whether to increase the money supply and government lending to financial houses and to raise or reduce interest rates. Such actions by the Fed change the value of every dollar around the world. They will change the price of labor, goods, services and real estate, as well as the return on savings.

But there will be no public hearings or public meetings at which the basis for the Fed's actions will be examined and those actions explained. It all will be accomplished in secret, with a vague communique issued afterward.

And who constitutes t he Fed's Board of Governors and the officials of the regional Federal Reserve banks? Mostly people from the financial industry. So it is no wonder that the Fed usually seems to be operating more for the benefit of financial interests than for the country generally, just as it seemed when, in 1999, Fed Chairman Alan Greenspan persuaded Congress not to require government regulation of the sort of financial instruments, called derivatives, that have upended the markets lately. While derivatives always posed a risk to the financial system and the economy, they also promised great profits to financial houses.

In any case, however the Fed's power is used, it is the power to influence and even rig markets and to decide all winners and losers in the economy. It is the ultimate patronage. And the exercise of that power, the monetary power of the United States -- the power to determine what money is, how much there is, its price, and the terms of its circulation -- is completely undemocratic, which is exactly why it is exercised in secret. For its exercise cannot bear scrutiny.

A few participants in the system occasionally have acknowledged as much, as when, in 1994, the Fed's vice chairman, Alan Blinder, remarked on national television: "The last duty of a central banker is to tell the public the truth."

Some of its critics consider the Fed unconstitutional. After all, the Founders opposed central banking, and the Constitution says Congress "shall have the power to coin money, regulate the value thereof, and of foreign coin." But whether Congress can delegate its power over money creation is less important than the Constitution's assertion that the decisions of the monetary power are among the most profound of government.

Of course, Congress well may not want the political responsibility that comes with the monetary power. The Fed can be a convenient scapegoat for what is really the irresponsibility of the rest of the government. But Wall Street wants the monetary power and does not have to bear any political responsibility for it, and that is the system the United States now has -- a system in which the monetary power has been turned over to what used to be called the Money Power. And this insult to public sovereignty over the most important issues of government is praised as the "independence" of central banking.

As the country faces another disaster engineered by the Money Power, it's time for Congress to remake the Federal Reserve System into something democratic, open, and accountable, or to reclaim the monetary power itself.

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