Back in November of 2013 I had a major bone to pick with at least one the proponents of the idea of the Federal Reserve independence meme. Mr. Kevin Warsh, former governor of the Federal Reserve, had written an op-ed that was published in the Wall Street Journal on November 11, 2013. The op-ed masqueraded as an apology for the QE 3 program. But, instead, it was laced with subversive overtones to the effect that the Federal Reserve has the authority to act on matters that the Congress does not regarding economic reform. The title of my response was “Who the hell do these people think they are?

Later I pointed out the appearance of a quid pro quo between Mr. Warsh and Richard Parsons, former Chairman of Time Warner, Inc and former member of the board of Citi Group, also the manager of the trust of Estee Lauder to which Mr. Warsh’s wife is an heir and benefactor of a payment from the trust two days after the op-ed appeared.

The appearance of a quid pro quo between Mr. Warsh and Mr. Parsons may have been mere coincidence and probably not even that important, however, because now, going through the 2009 FOMC transcripts, there are plenty more pieces of red meat subversion to sink my teeth into without the need for conjecture. And all of it revolved around discussion about how to exit from “extraordinary accommodation from expansion of the balance sheet” as if bad policy had nothing to do at all with the size.

Here in the March 2009 transcript, there is discussion about how the Fed would issue its own debt instruments, how to write the legislation so that the Treasury Department couldn’t stand in the way of the Fed issuing these debt instruments to be backed by the full faith and credit of the United States at will, or how they might be able to do this with existing authority if the Congress balked given the high probability it would do so because of the Constitutional power of the purse. Salted in is discussion about how these securities would get around requirements of TARP. Sure, we don’t like laws as they are, especially the Federal Reserve and Full Employment and Balanced Growth Acts, so we’ll just subvert them!

In my last post, my ranting about incompetence of both the Fed and the Obama administration, I closed with the observation that the Fed Borg is completely out of control and nothing will stop the madness until someone makes it stop. I had no idea how deep the rabbit hole of insanity actually went until I started reading through these little gems of subversion. And of course I now know why Mr. Warsh thought it was perfectly natural to suggest that the Fed hold elected officials over a barrel until they do what it wants – the bad attitude toward our laws, our democratic institutions and the Fed’s place in our system is rampant in the collective.

MR. MADIGAN. As Spence Hilton noted, it could be very useful to have an additional tool for draining substantial volumes of reserves from the banking system and shrinking the monetary base. Either the issuance of Fed bills or an enhanced supplementary financing program run by the Treasury on behalf of the Federal Reserve could be particularly helpful. The staff has drafted legislative language that would authorize these tools. Because the Treasury would have a substantial interest in such programs, and because we would need the Treasury’s support in advancing such legislation, we have been discussing this subject with the Treasury. Our presumption is that we would not seek legislation both for Fed bills and for an enhanced SFP. Rather, we and the Treasury together would raise both possibilitieswith the relevant congressional committees to discuss the substance and the political prospects for each. On the basis of those discussions, one approach or the other would be advanced. To give adequate assurance to the Federal Reserve and to the markets that these tools will provide the capability to tighten monetary policy as necessary and when necessary, the tools would have to be effectively under the Federal Reserve’s control.

Two possible constraints are of particular concern: the public debt ceiling, and possible interference by a future Treasury. To ensure that a binding debt ceiling does not disrupt the conduct of monetary policy, Fed bills or Treasury bills issued under an enhanced SFP program would have to be excluded from the debt ceiling. And to ensure that a future Treasury could not block the implementation of appropriate monetary policy, the Federal Reserve either will need to be able to issue its own obligations as it sees fit to carry out its statutory mandate, or it will need to be able to direct the Treasury to do so as its proxy.

However, the Congress may see the exclusion of Fed bills or SFP obligations from the debt ceiling as an unwarranted dilution of the congressional responsibility to appropriate government monies and to authorize the issuance of federal debt. And we recognize that the Treasury is concerned about the potential for issuance of such securities to interfere with the Treasury’s responsibility for managing the public debt.

Draft legislation prepared by the staff would assign the primary responsibility within the Federal Reserve for the issuance of Fed bills or SFP bills to the Federal Open Market Committee. This seems appropriate because the main purpose of the tool, as we see it, is to ensure the capability of the FOMC to tighten monetary policy when appropriate. We see Fed bills as a tool on the liabilities side of the Federal Reserve’s balance sheet that would essentially be symmetric with our asset-side open market operations.

The legislation should also address several other key issues. In that regard, we have included the following specific elements in the draft legislation we sent to the Treasury:

First, Fed bills would be full faith and credit obligations of the United States in order to maximize their acceptability to investors, to make them as close substitutes as possible for Treasury securities, and to minimize the interest expense of such obligations.

Second, for similar reasons, Fed bills should not be subject to state and local income taxes.

Third, the Treasury has suggested a statutory maximum maturity of Fed bills in order to limit interference with Treasury debt management. We have recommended a maximum maturity of one year. Treasury staff members prefer a shorter maximum term.

Finally, we have recommended that the Fed not be required to notify the Treasury a fixed number of days before issuing Fed bills or scheduling issuance of SFP bills, but rather that the legislation indicate qualitatively that issuance of Fed bills or SFP bills should minimize interference with the conduct of the Treasury’s regular debt management responsibilities.

As President Plosser and others have noted, there are pros and cons to the Fed bills and expanded SFP proposals. And even with the support of the Administration, the political prospects for such legislation are not clear at this stage. It is possible that the Federal Reserve may need to accept some changes to the draft legislation to obtain passage. One possible change that might help to help make the program acceptable to all interested parties would be a sunset provision under which the authority to issue such obligations expires after, say, five years.



The third of the four principles is the need to protect the Fed’s monetary stability function from the financial stability function, if you will. In particular, the Fed and the Treasury have agreed on the need for sterilization tools that will allow the Fed to prevent any increases in its balance sheet from affecting its ability to conduct normal monetary policy. As Brian already said, we have developed legislative language, and I have promises from the Administration of the highest level of effort to go to the Congress immediately—today—to try to get reactions, try to get some approval of either Fed bills or the SFP program, and that would be attached to legislation that is currently being contemplated. I’ll say more about that. As Brian mentioned, I think we would prefer Fed bills, but we are putting both out there. The other thing that we are prepared to do, if we get resistance, and which I think a few people around the table might prefer, is to put a sunset on Fed bills or on this provision, so that it’s only for the current situation.

This Fed bills scheme never amounted to much. But it’s been completely perplexing how the Fed can step out on the limb with explicit inflation targeting, with the general knowledge it would trounce of the employment side of the mandate, find itself in a word of doodoo because of said policy, and believe the only real solution is to become completely subversive because laws don’t match the effects of the regime, and not get that what it was doing collectively was ILLEGAL. Maybe someone did think about it, though fleetingly, because power-grabs are so much more fun than the boring and mundane of lawfulness and respect for democratic institutions.

PS: Newt Gingrich as a post about the real controversy over Hillary Clinton’s email problem.