Federal Reserve Precedent
posted by Gerard Magliocca
Here comes the payoff from my comparison of judicial and central bank independence, as described in my last few posts.
Respect for precedent is a useful way of limiting the power of an independent institution like the Federal Reserve. Furthermore, courts and central banks share a desire for stable policy to anchor expectations (about the rule of law and prices) while retaining the flexibility to adapt to new conditions. This leads to an obvious question. If courts find common-law stare decisis helpful, why not central banks?
In this respect, a recent change at the Federal Reserve may be far-reaching. Until the 2000s, the Federal Open Market Committee (FOMC) did not offer any explanation for its monetary decisions. Under Chairman Bernanke, however, the FOMC began issuing a written statement after each meeting justifying its action (or inaction). Every so often there is a “dissent” from the opinion, though the dissent is usually fairly brief.
At what point will the FOMC or dissenting bankers start citing these prior statements as some kind of authority? Put another way, how does a system of precedent develop organically? Initially, the relevant work product is descriptive. The English Year Books, which first reported the pleadings under the writ system in medieval days, began as a description of how cases were decided. Lawyers and judges later started looking at these reports for guidance (how long that process took–I don’t know). The same could eventually happen for central banks.
I would submit that this would be a positive development, as it would take monetary policy more towards a “rule of law” rather than a “rule of men,” without going to the extreme of the gold standard, which was too inflexible back in the day. But that gets close to falling outside of my limited area of competence.
One more post coming about how the Fed became independent, and then I’m done with this topic.
August 19, 2012 at 12:12 pm
Posted in: Jurisprudence
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Responses (4)
Peter Palms - August 20, 2012 at 5:40 pm
The Fed should be abolished . It a private cartel of bankers permitted by congress in 1913 to create money out of nothing. It is thee cause of all our economic difficulties
• It is incapable of accomplishing its stated objectives.
• It is a cartel operating against the public interest.
• It is the supreme instrument of usury.
• It generates our most unfair tax.
• It encourages war.
• It destabilizes the economy.
• It is an instrument of totalitarianism.
It is is not abolished the fourth collapse of the three previous Central banks of the United is imminent and unavoidable.
Long term price stability is possible only when the money supply is based upon the gold (or silver) supply without government interference.
For a nation to enjoy economic prosperity and political tranquility, the monetary power of its politicians must be limited solely to maintenance of honest weight and measures of precious metals.
A nation that resorts to use of fiat money has doomed itself to economic hardship and political disunity.
Fraction money will always degenerate into fiat money. It is but fiat money in transition
When men are entrusted with the power to control the money supply, they will eventually use that power to confiscate the wealth of their neighbors.
Peter Palms - August 20, 2012 at 5:44 pm
Following many years of net annual sales in the 400 to 500 tonne range, central banks, under weighted in gold and overweight in dollars and euro’s, became net buyers of gold in 2009 – in 2002 central banks sold 545 tonnes of gold, in 2011 they bought 440 tonnes.
“Central banks continued to buy gold; net purchases recorded during the first quarter, 2012 amounted to 80.8 tonnes, accounting for around 7% of global gold demand. Central banks from a diverse group of countries added to the overall holdings of the official sector, with a number of banks making sizable purchases.
After having already purchased ten tonnes of gold so far this year, the National Bank of Kazakhstan said it plans to purchase an additional fifteen tonnes this year and as much as seventy tonnes per year in 2013 and beyond.
“Nineteen fifty-eight marked the first year in which foreign central banks exercised their convertibility rights in significant amounts and returned their dollars for gold. US gold reserves fell 10% from 20,312 metric tons to 18,290 that year. The US made it abundantly clear stopping the drain of its gold reserves, and the depreciation of its currency against gold, was a huge priority. Ultimately ir removed the right to exchange dollars for Gold
Since 1913 the US dollar has lost over 95% of its purchasing power while gold has gone from US$20 an ounce to currently over US$1600.00 per ounce in the same time frame When people catch onto the fact that all government statistics are so massaged as to be useless, and actually start to think about how much more they are paying today over yesterday for the necessary everyday items they need to get by, than they will start to understand why gold is so important to a sound monetary system Continuing low interest rates, combined with higher inflation rates will equal low to negative real rates of return causing continued demand for gold which is being bought with dollars. The world’s continues to dispose of dollars and buy gold. China has imported more gold in six months than Portugal’s entire gold reserves
China continues to do one thing. Buy. Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn’t provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.
Here is the latest breakdown of gold reserves by Top 20 countries via the WGC:
World Offical God Holding
1 United States ( down from 18,290 mtins in 1958) to 8,135.5 tonnes
2 German 3,395.5
4 Italy 2,814.0
5 China 1,054.1
6Switzerland 1,040.1
7 Russia 918.0
9 Japan 765.2
10 Netherlands 612.5
11 India 557.7
12 ECB 502.1
13 Taiwan
14 Portugal 382.5
15 Venezuela 365.8
16 Saudi Arabia 322.9
17 United Kingdom 310.3
18 Lebanon 286.8
19 Spain 281.6
20 Austria 280.0
The world continues to sell Dollars and convert them into gold to escape the inflation caused by QE
If Congress won’t abolish the Fed. The world might abolish the dollar
PrometheeFeu - August 21, 2012 at 9:20 pm
I find it both unlikely and undesirable that the Federal Reserve start following stare-decisis.
Courts do not make law. They simply interpret and apply law. As such, should a court err in its decision, legislators are free to rectify the mistake by changing the law. As such, following stare decisis is harmless most of the time. Anyways, much of the time, stare decisis does not bind a court to adopt what would otherwise be a bad outcome, but simply one of several relatively equivalent outcomes.
Neither of these properties are applicable to monetary policy. The Federal Reserve has a mandate against which its policies can be evaluated. It does not make much sense then for the Federal Reserve to adopt consistency as a goal. If the policy will bring us closer to achieving the mandate, it should be implemented. If it will not, it should not. Whether the policy was tried before under similar circumstances, is a useful data point, but not authority.
I do favor rules of discretion, but a rule which gives weight to mistakes of the past, simply because they were made seems like a poor rule.
Gerard Magliocca - August 21, 2012 at 9:34 pm
Courts don’t make law? Oh dear.
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