EDITORIAL: The too-powerful Fed

Change is what the central bank needs, but won’t get

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President Obama is been shopping for a replacement for the chairman of the Federal Reserve, to be installed once Ben S. Bernanke rides into the sunset in January. Given the names floated so far, the printers where the currency presses are shouldn’t count on a break any time soon.

When the Washington rumor mill, which never closes, spat out the name of Larry Summers, the former White House adviser and a supposed monetary policy “hawk,” the markets were spooked. They became unspooked when he withdrew his name from consideration, leaving Janet Yellen as the front-runner. She is the No. 2 at the Fed and has solid credentials as an economist, which makes her a strong contender. But Mrs. Yellen is not the someone the Fed needs most, which is change.

Despite the spooked market, there’s no reason to believe that either Mr. Summers or Mrs. Yellen would do anything remarkably different if either got the keys to the U.S. economic engine. Both are devotees of John Maynard Keynes, father of the goofy idea that the government can create prosperity and wealth by spending money, even spending money that it does not have.

The best candidate for the job is the one who would best preserve the Fed’s independence. Mrs. Yellen was appointed chairman of the San Francisco Federal Reserve Bank in 2004, and vice chairman of the Federal Reserve in 2010, and has a reputation as a consensus seeker, though she has cast dissenting votes on occasion.

Given the complexity of the Federal Reserve, it’s not likely that many senators will spend the necessary hours in a confirmation hearing, going through the pros and cons of “quantitative easing.”

That’s what Mr. Bernanke calls his scheme for buying $85 billion in bonds each month to keep interest rates artificially low, at the near-zero level. That’s exactly what the politicians, who have racked up $16.7 trillion in debt, want to hear. Lower rates mean lower monthly debt payments, which gives them more money to blow. Keynesians believe expansionary monetary policy will keep the cost of borrowing low to encourage investment and homebuying. While the real estate market has recovered modestly, investors are still hiding in their basements.

Thanks to this administration’s regulatory onslaught and the Fed’s bond-buying binge, savvy entrepreneurs have been holding onto their cash. Without investment to fuel the economy, we’ve been limping along without any appreciable growth. The Fed’s easy-money policy has been as much the failure as Mr. Obama’s stimulus.

Mr. Bernanke’s potential successor deserves a grilling on this topic. The candidate should be asked whether it’s his view that Congress should scale back the extraordinary power the Fed has acquired over the years.

The Federal Reserve’s original purpose was to manage monetary policy independent of the pressure of politics and government. But instead of keeping prices stable, the central bank has a second mandate of keeping unemployment low. That’s what has led to the desire to use “quantitative easing” as stimulus. It’s why the Federal Reserve’s balance sheet is $3.6 trillion, up from just $875 million when Mr. Bernanke took over.

Mr. Bernanke said during Wednesday’s Open Market Committee meeting that the economy hasn’t been stimulated enough yet, that the economy is too fragile to cut back on the monetary stimulus. In other words, even though it hasn’t worked, he’s going to keep doing it.

As long as the dual mandate remains, there’s little hope for a change in the Fed’s excessively powerful role in the future. It won’t make much difference who sits at the head of the table.

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