Should laws on Federal Reserve be changed?

US Federal Reserve Ben S Bernanke and others comment on proposed legislation covering the central bank. We analyse the comments.

Headline: Fed fix flawed: Bernanke
Source: Today, 30/11/9

Quote1
WASHINGTON: In a commentary in the Washington Post yesterday, he [chairman of the Federal Reserve Ben S Bernanke] sharply criticised a Senate provision that he said "would strip the Fed of all its bank regulatory powers" and a House provision to repeal a 30-year-old law "to protect monetary policy from short-term political influence". "A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions," he said. The measures "would seriously impair the prospects for economic and financial stability in the US". ...

Comment1
We here see the start of a teleological (appeal to consequences) argument.

Argument A
If (pass new laws), then the following consequences:

1. strip the Fed of all its bank regulatory powers
2. un-protect monetary policy from short-term political influence
3. significantly reduce the capacity of the Federal Reserve to perform its core functions
4. seriously impair the prospects for economic and financial stability in the US

The unsaid part of the argument is that these consequences are all undesirable, and hence the proposed laws should not be passed. The problem now is that even when these are said, the argument is still incomplete. A complete teleological argument must consider all consequences to all affected parties, and only then should a decision be made, based on the nett benefit or pain caused by the proposed action (in this case passing the new laws).

Quote2
The 55-year-old Fed chairman has presided over the most expansive use of Fed powers since the Great Depression. While he has averted a financial meltdown, lawmakers and voters have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantling of Fed authority since the creation of the institution in 1913. ...

Comment2
It turns out that the proposed laws are precisely designed to dismantle Fed authority. This being the case, Consequences 1, 2, 3 identified by Bernanke in Quote1 above are precisely the intended consequences. All Bernanke has achieved with his comments is confirm that the proposed laws will achieve their aims. What he needed to do was show that these three consequences are undesirable, and this he has not done. However, Bernanke's alleged Consequence 4 (seriously impair the prospects for economic and financial stability in the US) is not affected.

Quote3
"Now more than ever, America needs a strong, non-political and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation," he [Bernanke] argued.

Comment3a
Now Bernanke strongly implies that the above Consequences 1, 2, 3 are undesirable. Since "America needs a strong, non-political and independent central bank", we clearly cannot:

1. strip the Fed of all its bank regulatory powers
2. un-protect monetary policy from short-term political influence
3. significantly reduce the capacity of the Federal Reserve to perform its core functions.

Comment3b
But this raises a philosophical question: If the central bank is to be "non-political", then to whom is it answerable? Surely a central bank must answer to the government, and a government must, by definition, be political.

Quote4
Senate Banking Committee [sic] Christopher Dodd and chairman of the House Financial Services Committee Barney Frank have, however, criticised the Fed for lax supervision and want to create a single bank regulator -- a new Consumer Financial Protection Agency.

Comment4
We have a new argument:

Argument B
Premiss1: If (Fed performs lax supervision), then (create new agency)
Premiss2: Fed performs lax supervision
Conclusion: Therefore, create new agency

This is a Modus Ponens (If P then Q, P, hence Q) argument. It is valid. All that remains is to prove the two premisses true. No proof to this effect is offered.

Quote5
As economist Allan Meltzer, a Fed historian and professor at Carnegie Mellon University, said in an interview: "Congress has a lot of public support for an attack on the Fed ... They bailed out everybody in sight."

Comment5
"Public support" boils down to popularity. This is not an issue that should be settled by popularity. Here there should be a consideration of right or wrong, effective or ineffective. Hence, the fallacy Argumentum ad Populum has been committed, and this argument should be rejected.

Quote6
However, Mr James Glassman, senior economist ad JPMorgan Chase noted that while "the political pressure on the Fed is out there", the Fed "has done a very remarkable job managing the financial crisis and the recovery of the financial markets is a testimony to that. Of all the things to 'fix', why would we tamper with the one that actually has worked well?" -- The New York Times, Bloomberg.

Comment6a
"The political pressure on the Fed is out there" again refers to popularity, and is correctly ignored.

Comment6b
Here is the next argument:

Argument C
Premiss1: If (Fed is done a good job), then (no need to change laws)
Premiss2: Fed has done a good job [from Conclusion2]
Conclusion1: Hence, no need to change laws.

Premiss3: If (financial markets recover), then (Fed has done a good job)
Premiss4: Financial markets recover
Conclusion2: Hence, Fed has done a good job [to Premise2]

Both arguments have the Modus Ponens form, and are therefore valid. The premisses seem intuitively to be true. The arguments are sound, and therefore succeed.

Case analysis

Argument A: Consequences 1, 2, 3 rebutted. Consequence 4 stands. But the argument is incomplete, and raises the philosophical question of to whom should a central bank be answerable. In limbo.

Argument B: The argument is valid, but premisses not shown to be true. In limbo.

Quote5 commits the Argumentum ad Populum. Rejected.

Argument C succeeds.

Verdict: No need to change Federal Reserve laws.

END