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The Credibility of the Federal Reserve

Posted by Larry Doyle on November 16, 2010 7:12 AM |

The Federal Reserve is arguably the most powerful institution in the world. Additionally, it is one of the least understood.

In the midst of the ongoing financial experiment known as quantitative easing are we supposed to blindly trust the abilities of our central bankers within the Fed, especially Fed chair Ben Bernanke? I know of no institution, especially with the size and scope of the Fed, that has so much power in one man’s hands and simultaneously so little transparency and accountability.

Yet, despite that lack of transparency and accountability, at this very point in time our nation’s future largely rests in the hands of one Ben Bernanke and his control of the Federal Reserve. Should we have reason for concern? We should.

That concern was voiced yesterday by Republican leaders and a number of Republican economists. The Financial Times highlights this development in writing, Fed Officials Defend $600 Billion Stimulus,

Mike Pence, chairman of the House Republican conference, on Monday said he planned to introduce a bill that would end the Fed’s dual mandate on unemployment and inflation and force it to concentrate solely on price rises.

A group of Republican economists have also written an open letter to Fed chairman Ben Bernanke saying that the “planned asset purchases risk currency debasement and inflation”. Separately, countries from Brazil to Germany have attacked the policy as a ploy to weaken the dollar.

Not surprisingly the Federal Reserve is fighting back. Fed vice-chair Janet Yellen and New York Fed President William Dudley have issued statements dismissing the concerns of the Republican economists and others who may wonder about the efficacy of Ben Bernanke’s quantitative easing program. While we can sit on the sideline and observe the daily tete-a-tete between these two camps, the larger question overriding this debate is the very credibility of the institution itself. I raised this question ten days ago in writing  The Real Cost of Quantitative Easing,

….. I am compelled to address what I view as the real cost of the Fed’s quantitative easing program. What is the Sense on Cents perspective of that cost? It is actually very simple. It’s called credibility.

I raise the credibility question again today. Are we to blindly defer to the Federal Reserve as being all knowing and all powerful in rescuing our nation? What do we know about the quality of the Fed’s staff? What do we know about the quality of the Fed’s models? What do we know about the quality of the Fed’s risk management systems? Very little.

While the Fed has had its detractors over the years, I think the most compelling piece of evidence in regard to the Fed’s credibility is an engagement between the Fed’s Inspector General Elizabeth Coleman and Congressman Alan Grayson (D-FL). This video clip has been seen by millions but it deserves further viewing in light of the ongoing and increasing large presence of the Federal Reseve in our daily lives.

Can we ever forget, …?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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