Recently, Steve Forbes visited Houma seeking support in his quixotic quest to upset GOP frontrunner, George W. Bush. Forbes has run his campaign more on ideas than on charisma and personal charm (he probably ranks somewhere between Bradley and gore on the charisma scale, which is somewhere below cyclone fences). Forbes has been the proponent of some good ideas, such as the flat tax (though I think that Tauzin's National Sales Tax is a better proposal). Forbes, of late, has proposed an idea that may not be such a good idea, that the Federal Reserve (or simply, "the fed") should be controlled by Congress, or as Forbes prefers, "making the fed accountable." Giving Congress control over the fed could return us to the stop-and-go roller-coaster economy of 70s, with inflation loop-di-loops, followed by sudden braking leading to economic whiplash.

A little bit of background is in order. The fed is a powerful institution that serves as the bank for our nation's banks. It is able to affect both interest rates and inflation by providing funds for banks to lend out. If the fed wishes, it can increase the rate of growth of bank funds, leading banks to drop interest rates so that businesses and consumers will increase their borrowing. With increased borrowing comes an increase in overall demand, businesses try to meet that higher demand by producing more which means more hiring. If the fed slows down the growth in bank funds too much instead of overall demand gets reduced, fewer workers are needed and get laid off.

With no political influence over their decisions, plugging their ears to keep them from the political "sirens' song," the fed needn't be drawn off course. When more and more people are busy working, voters tend to favor incumbent politicians, but when there a lot of people losing jobs, incumbents have a harder time getting re-elected. Incumbents vying for re-election will want hiring to go up prior to the election and will press the fed to increase the growth of bank funds before the election. Once an election is held, the politicians want to slow things down so that they can speed things up later. Economists call this a political business cycle because upswings and downswings are brought on by political forces.

Here is what Mr. Forbes had to say in an interview with the Bayou Business Review:

BBR: … (our) economics writer wants to know why you want to put the Federal Reserve under control of Congress. He thinks it might create a political cycle in the economy.

Forbes: I think it’s not so much putting it under control as to making it accountable for the consequences of its decisions. And right now, the Federal Reserve, for example, they have no real rules for how to conduct themselves. So right now they’re tightening up. They’re raising interest rates. They want to slow our economy down with the crazy reason they think prosperity causes inflation. That’s like going to the doctor, and the doctor says, ‘You’re in good health. We’ve got to make you sick.’ It’s bizarre. So I want to the Fed to be accountable and go on the right course, instead of going off the way they are now.

BBR: Don’t you think this might have the effect of say, "well it’s almost election time, let’s lower interest rates"?

Forbes: The Fed could say no. It doesn’t mean Congress is runs the thing. What it means, as matter of fact, is you have rules, rules that define what [sic.] they’re doing a good job or a bad job. So it’s not what Congress says. It’s what the rules are. That basic rule is to look at basic commodity prices. If they’re all going down, they’re being too tight. If they’re all going up, it means they’re inflating.

What Forbes fails to understand is that there is a substantial lag between the time the fed enacts some change in policy and when that policy starts to have an effect. If the fed waits for actual inflation to occur before it acts, a year or so will go between the time the fed applies its brakes and before prices slow down.

If all Forbes wants is for the fed to have widely known, fixed rules for the fed's operations, then he gets no argument from me, because policy surprises tend to cause the most trouble. If what Forbes suggests is that the fed must answer to Congress for its decisions, then we end up with political business cycles.

Being unable to rely upon chain-fence charisma and charm to get votes, if Forbes expects to overtake Bush and the other GOP candidates, at least one of his policy ideas is going to have to be better honed.