Many well respected economists lay much of the blame for the Great
Depression at the feet of the Fed. Put simply by Nobel Prize-winning economist
Milton Friedman, “We had repeated recessions over hundreds of years, but what
converted [the 1929 recession] into a major depression was bad monetary
policy.” Unlike previous bubbles where the Fed gets only partial blame or can
reasonably defend its actions, it is accepted by many that the Fed royally
screwed up almost a century ago. All that said, however, it is the height of
hyperbole to claim the policy mistakes or inaction of the Fed is “evil.” In
fact, most monetary experts say it was inaction of the Fed that caused the
Depression – not active malice. Incompetent officials who fail to properly
perform their roles managing the money supply may be rightly despised for their
lack of foresight or outright stupidity, but their gaffes are not a sign of ill
will.
Unfortunately, the Federal Reserve is a very powerful entity with very real
clout. The reality is that good intentions do not minimize the impact of bad
moves and incompetence at the Federal Reserve – no matter how impressive the
resume, noble the motivation or well-intentioned the philosophy. It’s telling
that Friedman also said of the Fed’s actions in the Great Depression, “There’s
no other example I can think of, of a government measure which produced so
clearly the opposite of the results that were intended.” In short, even if you
are 100% willing to embrace the role and responsibility of the Federal Reserve,
the reality is that the human beings who operate the institution are far from
perfect and they cannot be left off the hook as if they forgot the
dry-cleaning. When the Fed makes mistakes, we all suffer the very real and very
serious consequences.
Myth #2: The Fed isn’t accountable to
anyone and has never been audited
Many conspiracy theories about the Federal Reserve include a thought along
the lines of “Whenever a Congressman has introduced legislation to audit the
Fed, that bill is always defeated.” While many efforts targeting the Fed have
died on the floor, in fact independent financial audits of the Federal Reserve
banks are conducted by accounting firms each year – as well as inquiries
requested by the Board of Governors. Consider a 1992 GAO audit that drew
attention to the Fed’s sluggish compliance with regulatory reforms mandated by
the Foreign Bank Supervision Act of 1991. A previous audit also criticized
payment system activities under the Monetary Control Act of 1980 for unfairly
competing with some private banks. These are just two examples, proving
that the Fed is not a black box but subject to information requests and audits
like a host of other governmental agencies.
Those selfsame audits that shed light on Fed shortfalls have also been one
of the biggest motivators for reform, via frustration by the auditors
themselves. In fact soon after the 1992 study mentioned above, GAO comptroller Charles Bowsher went before the Committee on Banking, Finance
and Urban Affairs to lament that his office could have done better work if they
had been given broader access. Specifically, Bower defended the GAO’s right to
audit daily government securities auctions and foreign currency interventions –
and supported a bill that would allow greater access to Fed activities. One
that, surprise surprise, eventually died on the House floor. Ron Paul supporters
will notice Bowsher’s comments sound curiously like
the
Here we get to a very sticky subject – the concepts of a weaker dollar or
moderate inflation sometimes being “good” things. If you recall events in the
financial markets in late 2008 and early 2009, one of the biggest concerns on
the minds of most economists was the threat of deflationary death spiral akin
to the mess that created
For all the weakening of the dollar, there hasn’t
been a material change in the import-export disparity for the
Myth #4: The Fed is a private enterprise
not beholden to the government
It’s true that the 12 Federal Reserve banks are organized like private
corporations, and are designed to operate largely independently of the federal
government. It’s also true that big financial firms like Citigroup
(NYSE: C)
and Bank of America (NYSE: BAC)
own stock in the banks and are paid a fixed 6% dividend on their holdings in
District Reserve Banks. However, private bankers do not “oversee” the Fed since
that stock does not come with voting rights. It is the seven members of
the publicly appointed Board of Governors – of which Ben Bernanke is the
chairman – who set national monetary policy and give marching orders to the
District Reserve Banks that they oversee. Private banks
have no direct role in that process.
Though the dividend-paying Fed stock doesn’t come with a vote on day-to-day
affairs, it does give private member banks a say in the Reserve Bank board of
directors. Member banks elect six of the nine members of Reserve Banks’ boards.
And it’s almost a given that former Wall Street banking execs wind up running
the major reserve banks in the system. Take the current president of the New
York branch of the Fed, William Dudley, served almost 20 years at Goldman
Sachs (NYSE: GS).
The fact is that since it is set up as a public-private venture in an effort to
give free enterprise a stake on behalf of national businesses, there are
inherent limits on the amount of control the government – and subsequently the
American people – can exert.
It is folly to believe that a major economic power could exist without a
central bank to manage monetary policy. Let’s look at some history: For nearly
eighty years, the
Fed defenders point to these historical events — or to Paul Volker’s deft
moves to end U.S. stagflation in the 1970s — as proof the economy isn’t better
off without a central bank.But critics have an
equally damning list of disasters that occurred under the Federal Reserve’s
watch. Many commentators blame former chairman Alan Greenspan for partially
inflating the recent housing bubble with persistently low interest rates during
his last few years at the Fed. Others criticize Greenspan for not raising rates
fast enough during the Dot-Com bubble, or failing to use other tools at his
disposal such as raised margin requirements. And while only time will tell
whether Ben Bernanke’s massive “quantitative easing” policies will ultimately
result in more harm than good, there are very
legitimate concerns about the actions. In short,