Oh Fed independence. I've promised you kids a long drawn out piece on the importance of Fed independence and what it means for those of us who may find ourselves questioning the Fed's motivation - so what better time than the day of Fed Vice Chair Donald Kohn's appearance on the Hill while I'm 10,000 feet above Georgia on my way back to San Francisco? Now we're talking. If only this plane had WiFi.

Now before we get into Kohn's speech, I want to make sure that we understand Fed independence and what it means for our central bank. I know what you're thinking; Jr Deputy Accountant, since when do you buy into manufactured Fed lines on price stability and unicorns like "independence"? Bear with me, kids, we're getting there.

So the first and most natural disclaimer required here is to say that if I had my way, we'd have killed the Fed already. But since the beast seems reluctant to go down without a fight, the best we can do is find the self-imposed cracks in the Fed's questionable foundation and start hacking away with the Golden Pick-Axe of Snark hoping to break through to the chewy nougat center. With me? Let's go then!

Well what is this bullshit about Fed independence anyway? The official line from the Jekyll Island boys is that for the Fed to function as a truly effective central bank, it must be disconnected from the disaster that is Washington politics. Point to them, as I believe we all understand at this point what politics can do when mixed with finance - except wait a minute, how is it that the Fed is supposedly accountable to Congress and yet independent all at once? Good question. We'll get there.

So here's how it works (with Vice Chair Kohn's help in explaining the "scam"):

"The Federal Reserve derives much of the authority under which it operates from [1913's] Federal Reserve Act. The act specifies and limits the Federal Reserve’s powers."

That's funny. Is there anything in the Act about shoving conjured-up liquidity into the economy like feeding a goose destined for a fate as some overpaid Wall Street shmuck's foie gras? That's what I thought.

"In 1977, the Congress amended the act by establishing maximum employment and price stability as our monetary policy objectives; the Federal Reserve has no authority to establish different objectives."

Now just to make sure we are all on the same page here, "price stability" means "keeping the crackheads away from the printing press" - or rather, the Fed is given a certain target to play with as it manipulates the money supply. This is akin to telling the Fed that it can screw whomever it chooses as often as it cares to as long as it pulls out in time. Now you can imagine how difficult this can be for our central banking friends in time of economic turmoil (see also: right now) knowing that they're all about the monetary poontang and given the green light to tear up all the financial ass they can find as long as they operate under certain restrictions. Still with me? Hope so.

In order to facilitate this goal, there are of course multiple definitions of inflation and money supply just in case one scenario were to be more counter-intuitive to this declared goal than another. Like core inflation; separating the staples from everything else gives the Fed a bit more wiggle room. Just in case it doesn't pull out the monetary mojo in time, ya dig? Things happen, we know how it is. Quick, roll over boys, oil feels too damn good and is ramping up as we speak - awww snap!

I digress. Says Kohn of this noble objective:

Moreover, as I will discuss in detail later, the independence that is granted to the Federal Reserve is subject to a well-calibrated system of checks and balances in the form of transparency and accountability to the public and the Congress.

Now I've said as much before but perhaps now would be a great time to reiterate that I really don't like this guy. He's got about as much charm as a splintered broom handle rammed up your backside and doesn't even exude the central banker suave I've come to know and love a la our buddy Zimbabwe Ben Bernanke. Kohn is generally droll, obscure, and about as transparent as a chalkboard. This statement is a perfect example of such behavior; surely Kohn himself understands that on the off chance that the Fed were ever loyal to a "well-calibrated system of checks and balances" that little song and dance flew directly out of the window as soon as Tim Geithner began engineering the AIG bailout from up high at FRBNY. Right? It's more frightening to consider that he may not have any idea whatsoever that nearly every word out of his mouth is absolute crap.

As always, we've got to make sure we're making the important distinction between the monkey business at the Board in DC and the fairly independent and community-based process of the regional Fed banks (New York excluded as always, as they are in some ways more deeply entrenched in the treasonous behavior than their colleagues at the Board of Governors - yeah I said it. You think the bank who supervises the big boys of banking and spat out Tim Geithner is entirely legit? As we like to say in San Francisco, "bitch please!"). How independent can the Board be with a Chairman installed by whichever President happens to be filling the latest vacancy? Think now, kids, this is going to be important as we go forward towards January 2010 and the problem of a Zimbabwe Ben re-election or lack thereof. Trust me, the alternatives to ZB may end up being worse. I know, I find it quite unbelievable myself.

Kohn goes on to describe an almost Oz-like idea of a truly omnipotent central bank fighting against the tendency for sovereign nations to apply political pressure to monetary policy to the detriment of their respective currencies. Now a reasonable person might argue (hey, have you seen the dollar lately? I know I have. If the euro and pound weren't being quantitatively eased to destruction as well, I guarantee you the effect of the Fed's monkey business - independent or not - would be far more evident) that the Fed has done well to avoid the particulars of politics if we are simply looking at "keeping the politicians out of monetary policy" and part of the Fed's ability to do this is derived by its secrecy.

The Federal Reserve cannot both be both independent and transparent at once. And of course Kohn misses this point in his little song and dance (shock) and goes so far as to say "In a democracy, any significant degree of independence by a government agency must be accompanied by substantial accountability and transparency." Yes, I suppose that's totally the case but as we alllllllll know by now, quasi-government doesn't count as government so Kohn isn't even referring to his own damn agency. If he were, we wouldn't be discussing Fed "independence" because it would be a product of the political machine instead of a reluctant participant in it only when the pressure gets too much to take. Give and take here, kids, and the Fed is well-versed in the art of the political reacharound.

Then we have the (perceived as) inevitable boom and bust of a bubble-based economy - Kohn, of course, like many of his Fed counterparts, simply fails to understand that their job oftentimes is to inflate the bubble. That's it. What again did Alan Greenspan accomplish in his tenure? It is a testament to his might as a central banker that he was able to inflate the largest bubbles in American history and surely no coincidence that he spent 18 years in his post. Do you want to know why I think our dear OMGObama will oust Bernanke in 2010 when his term expires? Because our buddy Zimbabwe Ben has shown that he can quantitatively ease with the best of them but remains entirely impotent when it comes to creating those precious bubbles.

Kohn continues:

The second way in which political interference with monetary policy can damage the economy is by promoting an undue focus on the short term. Because excessively easy monetary policy tends to boost economic activity temporarily before the destabilizing effects of higher inflation are felt, policymakers with a relatively short-term outlook may be tempted to ease monetary policy too much. The eventual result is higher inflation without any permanent benefit in terms of employment, an outcome that is inconsistent with the dual mandate for maximum employment and price stability. Thus the increase in inflation must be followed by policies to bring inflation back down--policies that have the side effect of temporarily reducing output and employment.

Um... 'cuse me, Donnie? What in the fuck are we doing as we speak? The Fed as yet still has no exit plan to soak up the excess liquidity its got sloshing around - sorry, boys, but there really isn't a monetary Sham-Wow you can pick up from late night TV to sop up the mess. Aaaaaand with its only option being to sell Treasurys, well, you can see how this might be a problem seeing as how the Fed is one of the only T-bill buyers. That's good news. Wait until the Fed decides to stop buying them, then you can really worry.

So if the Fed is the best equipped to take its indepence and parlay that into a lifetime of Regulator to Beat all Regulators, why would Kohn even mention the "PPT" word?

[W]e already work closely with other federal and state agencies and participate in groups of regulators and supervisors such as the Federal Financial Institutions Examination Council and the President’s Working Group on Financial Markets. These responsibilities and close working relationships have not impinged on our monetary policy independence, and we do not believe that the enhancements proposed by the Administration to the Federal Reserve’s supervisory and regulatory authority would undermine the Federal Reserve’s ability to pursue our monetary policy objectives effectively and independently.

You don't think being the pusher handing over the funny money to keep the PPT kids busy at 3:45 every trading afternoon is a conflict of interest, Donnie? Oh shame.

In summation (sorry, this happens to be a long flight and without WiFi I'm sort of stuck on one speech while I sit through the next 3 hours traversing the nation from 30,000 feet so I may be rambling here), Kohn wants Congress out of the Fed's business. Trust us, he says, We've got our regulatory framework and our Congressionally-mandated objective to keep the alchemy of money creation to a minimum, what more do you want?

Well maybe Congress is the problem then? I mean how else could you explain Congress waiting until now to start poking at the Fed's strange motivation (see also: Issa v Bernanke and HR 1207) after years of blind faith in the inherent goodness of our central bank? What the fuck is that all about anyway? If Congress is supposed to be the Fed's keeper, why in the hell did they allow them to run wild in the first place?

The problem runs far deeper than regulation of systemically-important institutions and independence from political motivation. I only hope we figure that out before the valuables have already been lifted off the sinking ship and the American taxpayers are left looking stupid holding the bill.

I highly recommend Kohn's bit on the GAO and how the Fed is already "audited" in this speech. We'll save that one for another day.

Bah on Kohn. I really wish this douche would try harder next time.