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Tuesday, August 25, 2009
5:38 PM EDT
Angelyn Dionysatos

A Conflict of Interest Rates?

The following article can also be found here on the official website of the Alliance for Worker Freedom.

Yesterday, Denis M. Hughes, president of the New York State AFL-CIO was named chairman of the New York Fed, giving him a seat among the Federal Reserve’s powerful group of monetary architects, the Board of Governors.  While one may consider what qualifications his background as an electrician turned union rabble-rouser provide him for this very influential position, more troubling is the concern that his allegiance to labor, rather than the interest of the economy, may dictate his policy-making decisions.

Union pension funds are highly dependent on Federal Reserve interest rate-setting policies.  While the Fed only sets the short-term rates, such rate changes will steer long-term rates in the same direction.  When long-term rates go up, less new money needs to be deposited into union pension coffers (since the existing money is assumed to compound faster).  When long-term rates go down, more money needs to be deposited into the funds (since the existing money is assumed to grow more slowly).  Unions, which manage these pension funds, always want to have more new money to play with.  Thus, unions might tend to be in favor of lower-than-optimal interest rates.
 
The conflict of interest here is clear.  A Federal Reserve governor has a mandate to set rates based on price stability and full employment.  He doesn’t (or shouldn’t) have any extraneous motivations, like the health of his associates’ pension plans.
 
It is hard not to speculate that Hughes, himself a union member since age 16, has an incentive to favor the unions over the health of the economy.

So, here’s a question for him: As a lifetime union member, will you be able to you divorce yourself from your loyalty to organized labor and base your policy on sound economics?  My inclination is “no”.
 
And for Americans, do we really need a union stooge playing a pivotal role in our monetary policy when we know he is serving a higher master?
Posted by Angelyn Dionysatos on Tuesday, August 25, 2009 5:38 PM EDT
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