Levy Scholars to Advise on Fed Reform

Michael Stephens | October 24, 2011

The office of Senator Bernie Sanders (Independent – Vermont) has announced the formation of a panel tasked with drafting legislation to reform the Federal Reserve.  Levy Senior Scholars Randall Wray and James Galbraith and Research Associate Stephanie Kelton have been named to the team.

Wray’s recent brief on the Federal Reserve, co-authored with Scott Fullwiler (“It’s Time to Rein in the Fed“), looks at our over-reliance on the Fed (something Wray has discussed elsewhere) and the relative lack of transparency and oversight, wading into issues surrounding democratic accountability and the “independence” of the central bank:

There is no difference between a Treasury guarantee of a private liability and a Fed guarantee. If the Fed buys an asset (say, a mortgage-backed security) by “crediting a balance sheet,” it is no different from the Treasury buying an asset by “crediting a balance sheet.” The impact on Uncle Sam’s balance sheet is the same in either case: it is the creation, in dollars, of government liabilities, and it leaves the government holding some asset that could carry default risk.

…in practice, the Fed’s promises are ultimately Uncle Sam’s promises, and they are made without the approval of Congress—and in some cases, even without its knowing about them months after the fact. [We are not] implying that Uncle Sam would be unable to keep such promises. There is no default risk on federal government debt, and the government can afford to meet any and all commitments it makes. Rather, we are simply emphasizing that a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the United States. Our question is one of accountability: should the Fed be able to make these commitments behind closed doors, without the consent of Congress?

Read the policy brief here (one-pager here).

An earlier working paper by Galbraith et al created quite a bit of buzz for its data suggesting the presence of partisan bias in Fed policy during presidential election years (an issue that came up again quite recently), but its main arguments centered around identifying the “real” reaction function of the Fed:  namely, that in recent decades the central motivating force behind Fed behavior is a fear of full employment.  The paper also reveals that Fed policy plays a significant role in increasing inequality.  Read the working paper here.  (Galbraith’s 2009 congressional testimony on the Fed is here.)


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