Those who want more oversight argue that the Chairman of the Federal Reserve and the institution at large has too much power to be without some outside influence. They argue that the Federal Reserve can do whatever it wants whenever it wants based on its own interests. Those interests (the argument continues) are banking interests and because banks technically own and control the Federal Reserve, it is a classic conflict of interest. On the other hand, a smooth and effectively functioning Federal Reserve depends on decisions that are not politically motivated. Those who support the current status of the Federal Reserve contend that it would be disastrous to allow any consideration other than economic concerns to influence the direction of monetary policy. Supporters of this position contend that politicians have a bias toward easy money, which would provide a quick fix for a bad economy especially when approaching an election. The approach to central bank oversight differs in various countries. For example, the Bank of England has relatively little independence from political control. The government sets interest rate targets and money supply objectives that the bank tries to hit. Unfortunately, the net result is that England has relatively high inflation rates. Canada and Japan allow their central banks a modicum of independence, but their banks are also pressured to produce interest rates and money supply that support a political agenda.
Question 6: Is the Federal Reserve more effective in fighting recessions or inflation? Answer 6: As with most issues in economics, an argument can be made that the Federal Reserve has done a fairly good job on both recession and inflation until you look closely. The argument on the side of inflation is that the Federal Reserve can stop individuals and businesses from borrowing by raising interest rates and making less credit available, but the Federal Reserve cannot force businesses and individuals to borrow during recessions by lowering interest rates and making more credit available. Of course, the Federal Reserve can make cheap money very enticing, but the Federal Reserve cannot force people to borrow when they are not convinced they have the ability to pay the money back. This argument sounds plausible and is a nice-sounding theory, but looking at inflation and recessions in the economy reveals a different story. Prices are now five times higher than in the base year of 1967—not exactly a resounding triumph. Recently the Federal Reserve has been doing a credible job, bringing the rate of inflation to approximately 3% with what is called a disinflation target. The argument that the Federal Reserve is doing a good job of fighting recessions is backed by strong evidence. Recessions in the last forty years have been mild and short and typically no longer than a year.
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