Giving congress a greater say in setting interest rates worries me

Senator Dodd wants politicians to have a greater say in setting interest rates, and has a proposal which would give Senators a lot more power than they now have to do just that. To be clear, at the moment they have no power whatsoever, other than the Senate must confirm the nomination for head of the Federal Reserve. They can demand that Ben Bernanke come and sit in a hearing room, but they can't make him do a damn thing after he walks out the door.

That independence is extremely important. Americans tend not to think about whether or not there is a problem with confidence in the value of the US dollar. They simply assume that our currency is as solid as gold, that the sun will rise tomorrow, grass is green, the sky is blue, etc. They would benefit from a look at how things happen in other countries. I have done a lot of consulting with governments in small countries about how to run their exchange rate and monetary policies (among other things), and there can be major opportunities not just for mismanagement, but also for corruption, if politicians have the power to influence monetary policy.

For one thing, who ever heard of a politician wanting higher interest rates? Yet, unfortunately, we need them sometimes to avoid inflation and to avoid devaluing the currency. Would politicians allow it? Maybe, maybe not. At a minimum there would be built in bias toward inflation. And as for corruption, just imagine the money you could rake in if you knew ahead of time that Senator X was going to engineer the nomination of a known easy-money candidate to the Federal Reserve. This isn't imaginary. Such things have happened in other countries, and the profiteers on Wall St. wouldn't blink for a second if they thought there was a profit opportunity.

Even Senator Dodd's proposal to limit the powers of the Fed to make emergency loans worries me. I don't like for one second the terms under which the Fed has essentially given away huge sums to Wall St. in the past year or so. But I would like it even less if they didn't do it at all. What is needed is willingness to enforce regulations on Wall St., not injecting political grandstanders into situations where quick action is needed to bail us out of the incompetent economic management of morons like the Bush administration.

So count me as a fan of regulation but also a fan of independence of the central bank. Some things are just so obviously beyond the ability of politicians to get right that we shouldn't even let them hint at doing it.