The Washington Times
By John Cornyn and Kevin Brady
January 13, 2014
Maintaining the purchasing power of the dollar is critical to a strong U.S. economy and to the economic well-being of middle-class American families. The Constitution grants Congress power over our nation’s currency. One hundred years ago, Congress assigned this responsibility to the Federal Reserve. The Fed’s centennial anniversary, reached last month, marks an appropriate time for a constructive and bipartisan review of America’s central bank’s performance over its first century and the proper role for the Fed in the future.
History proves that a sound and stable dollar is the best foundation for robust economic growth. Absent stability, price inflation steals from the pocketbooks of American families, punishes savers and increases uncertainty. This weakens business investment, job creation and real income growth for families, especially for those working to climb the economic ladder.
Even if consumer price inflation remains tame, asset-price inflation can create unsustainable bubbles that devastate the American and global economy when they burst. On the flip side, deflation can be equally destructive, leading to debt defaults, bankruptcies and financial meltdowns.
Unfortunately, the purchasing power of the U.S. dollar over time has been anything but stable. A dollar in 1967 is equivalent to barely 14 cents today.
The past decade of generally accommodative monetary policy has been accompanied by a significant decline in the international value of the dollar. This decline has added to the cost of international commodities such as oil and gasoline.
Europe’s financial crisis and global uncertainty helped to restore some of the value of America’s currency. Being the best-looking horse in the global glue factory is a dubious honor, though.
There are significant and thoughtful disagreements among policy experts and free-market leaders about whether the Fed should maintain its current policies or begin aggressively reining in its easy-money policies to avoid stoking new asset bubbles or planting the seeds of future inflation.
There are concerns about the dual mandate that Congress placed on the Fed in 1977; picking winners and losers in the credit markets, which jeopardizes the political independence of the institution; the make-up of the Federal Open Market Committee; and the transparency of the Fed.
Perhaps the best way forward is to step back and take a longer view of the institution. We believe the moment is right for an objective, comprehensive survey of the Fed’s existing mandate and policy framework. That’s why we have introduced the Centennial Monetary Commission Act, which would establish an independent, balanced, bipartisan panel to collect evidence and make recommendations to Congress.
Such an evaluation is long overdue. The Fed’s original mission was to provide an elastic currency within the context of the gold standard to combat seasonal financial issues. A hundred years later, its mission has obviously become much broader.
Today, in pursuing its employment mandate, the Fed has purchased more than $3 trillion worth of Treasury bonds, federal agency bonds, and federal agency mortgage-backed securities — its so-called “quantitative easing” strategy. Its total balance sheet now stands at $4.1 trillion — four times larger than before the crisis. The Fed has also generated a staggering $2.4 trillion in excess reserves.
So why hasn’t this explosion in the monetary base ignited higher general price inflation?
In normal times, commercial banks convert excess reserves into new loans and investments, boosting the demand for goods and services. However, in recent years, commercial banks have been reluctant to lend and invest, and so the Fed’s dramatic monetary expansion hasn’t increased aggregate demand to the levels we might have expected.
Indeed, despite the Fed’s “monetary morphine” stimulus to Wall Street, America is experiencing its weakest economic recovery of the postwar era.
Admittedly, quantitative easing and extraordinarily low interest rates have clearly boosted stock prices. The S&P 500 Total Return Index adjusted for inflation has more than doubled since the official end of the recession in June 2009. America’s middle class hasn’t been as fortunate. Real disposable income per capita has increased by less than 4 percent. At this point in an average recovery, a family of four would have nearly $11,000 more to spend than the Obama recovery provided. We don’t begrudge Wall Street’s success, but we do lament the fact that so many middle-class families on Main Street have been left behind.
While families’ net worth on paper looks much better today than it did in 2009, will the gains prove illusory? Is America headed for a major stock market correction, or perhaps even another crash? Will the fuel of excess reserves spark general price inflation?
Most importantly, what is the best role and rules for the Federal Reserve to ensure America remains the strongest economy on earth through the 21st century?
These are the thoughtful issues and long-term view the members of the Centennial Monetary Commission would address.
Both Republicans and Democrats have a common interest in getting monetary policy right. Good monetary policy provides the foundation for a strong economy that is essential to eliminating our fiscal deficit.
Given the centennial and the experience of the recent financial crisis, there has never been a more appropriate time to re-examine the Fed’s role in American life.
Senator Cornyn serves on the Finance and Judiciary Committees. He serves as the top Republican on the Judiciary Committee’s Immigration, Refugees and Border Security subcommittee. He served previously as Texas Attorney General, Texas Supreme Court Justice, and Bexar County District Judge.