MONDAY NOVEMBER 23, 2009

I'll take the devil I know.

There is a big battle in Washington over the Federal Reserve Bank's "independence."  In theory, the Fed is an independent agency of the U.S. government.  It was created with a somewhat conflicting mission of maintaining price stability (i.e inflation police) and low unemployment.  It is easy to see how this mission would be subject to political vagaries Congress.  Given this, the Fed was given its independence in order to prevent the Congress from asserting political pressure on the Fed's monetary policies.

As a result of the economic crisis, the Fed's independence has come under scrutiny.  A bill is in front of the Congress that would subject the Fed to an audit by the General Accounting Office.  And so, the battle is joined.  Those in support of the bill argue that the Fed has spent billions if not trillions of dollars in an effort to stabilize the economy.  No one knows where or how the money was spent.  These critics have a valid point.  Further, they claim this bill only calls for an audit and will not interfere with policy making.  On the other hand, the Fed and its supporters are fighting this bill as a great affront to its independence.

Our government has a history of passing bad bills such as Sarbanes-Oxley in the aftermath of crisis.  While I understand the desire for accountability at the Fed, it is not difficult to see how this small step of accountability could be the first step for Congressional hijacking of monetary policy.  After all, only Congress should be able to spend billions without any accountability!

POSTED AT 1899-12-30 08:33:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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