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The Fed now finds itself in a kind of trap. For years, including the Greenspan years, the Fed conducted itself in a low-profile manner that emphasized inflation fighting, professionalism and technical complexity, feeding off the Volcker heroics. Although Greenspan became a kind of Washington celebrity -- that status, enhanced by his marriage to NBC's Andrea Mitchell, brought considerable political clout -- what he actually did and how he did it remained, at best, obscure. On Main Street America, the folks might have known Greenspan's name and doleful visage, but, as Ben Bernanke discovered on his meet-and-greet town halls this summer, few Americans have a clue that the Fed was a central bank, or more to the point, what central banks are supposed to do. That welcome obscurity was for years enhanced by the fact that times were, generally, quite good. Even as the Fed lost economic leverage as the role of commercial banking waned, both politicians and voters were happy to leave the central bank alone as long as growth ticked along and unemployment stayed down. Now we're in a whole new game. The fact is, the Fed would have gotten scorched even if it hadn't overseen some of the mortgage business and engaged aggressively in bailouts; but of course it did. And then it went a step further by reaching for systemic powers. Now its traditional opacity and haziness works against it. First, the economy is suffering, and the Fed "controls" the economy. Second, the Fed is mysterious, technical and opaque, and we know a lack of transparency leads to evil. The nuanced notion that the Fed may well have been captured by the same general euphoria and set of ideas about markets that beset Wall Street and Main Street does not play in a conspiracy-riddled, often aggressively anti-intellectual climate. Although in real life the Fed may have already been politicized, in the sense that its policies encouraged the kind of widespread consumption that satiated everyone for years, the "solution" to the Fed's problem is to lash it ever closer to Congress and the White House. Oh good. That'll keep the bubbles down. The same paradoxical situation exists for transparency. Particularly under Bernanke, the Fed became more transparent, well before the crisis. But that larger dose of transparency, that shucking off of the robes of technical obscurity and magic, only makes the central bank appear more vulnerable. This is Bernanke's dilemma. He can only escape politics by playing politics. But in playing politics -- town halls, folksy testimony, the reach for the kind of systemic power that is, by definition, deeply political -- he surrenders that remoteness and autonomy. His situation right now is like quicksand. Does it matter that Ron Paul, at least on the issue of the Fed, is nutty? Does it matter that it's nearly unimaginable that a developed economy could operate without a central bank? Or that, as FT mutters, long-term interest rates would rise? No -- this is politics. Who knows from interest rates? Politicians are playing to a crowd that's essentially ignorant. The plight of the Fed weirdly mirrors the entire program of financial reform, not to say the healthcare overhaul. Because Bernanke and Paulson did succeed in avoiding ultimate collapse, by acting aggressively, by throwing money around and by stretching past practices, rules and laws, we can now afford to play these games like the Paul audit; if you wanted real reform, they should have sat back and let everything collapse. The fastest way to get pols and ideologues off the Fed's back would be to close the joint up. In a week, everyone with a brain would recognize that the Fed had a purpose and a role. But who would want to suffer through that? A final thought. The truth is that politicians, like most Americans, don't want to spend their time pondering the workings of the macroeconomy. They didn't take that class in college, and they're hardly eager to get a headache pondering it today. Besides, Congress, at the end of the day, doesn't want to be responsible for an economy it doesn't understand or can control, Fed or no Fed. Bernanke's best strategy is probably the one he's now pursuing: a kind of rope-a-dope. Lay back, take the blows and wait for everyone to get bored and wander off, leaving Paul and his supporters to their conspiracies and their highway signs. The problem is, how much damage will the institution have absorbed by then? And is this any way to run a central bank? - Robert Teitelman Robert Teitelman is the editor in chief of The Deal.
CategoriesComments
From: Charles,
Mr. Teitelman, Please explain why it is "nearly unimaginable that a developed economy could operate without a central bank." Evidently it appears to many of your fellow citizens that our economy seems to be doing very poorly, despite our having a central bank. According to the Federal Reserve's website (http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#3), "the Federal Reserve's responsibilities fall into four general areas: 1) conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices 2)supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers 3) maintaining the stability of the financial system and containing systemic risk that may arise in financial markets 4) providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation's payments systems"
Charles
-C
Posted on:
October 8, 2009 12:00 PM
From: Michael,
Money is power. If you can create money, you can essentially give yourself unlimited power. Where is the accountability for this creation of money/power? Are we truly supposed to trust the unelected at the Federal Reserve? Furthermore, can you explain why counterfeiting is illegal and bad for the economy? Then, could you explain why it is OK when the Federal Reserve does it?
Posted on:
October 8, 2009 12:27 PM
From: bgodley,
This article touts historically woeful ignorance of the FED and it's actions by the common citizen. It states for those reasons it has created this weird conundrum for the FED. However, as we can see that is changing. What this article completely misses is that there has been this interesting effect. - The more interest and understanding the FED has received by common citizens the more questioning has occurred of it's use and practice. So the argument that the more it would have been understood the more it would have received lenient opinion holds not water. One more point. Insanity is considered the repetition of a wrong expecting a different result. If we see that the FED has indeed failed in it's effort to handle economic trouble and in many cases likely created financial bubbles why repeat the mistakes? I daresay opinions as authored here, especially without any true inspection, are truly the nutty ones.
Posted on:
October 8, 2009 12:58 PM
From: tc,
We "aggressively anti-intellectual" types, also known as followers of Austrian Economics, are a pretty tough crowd. Unfortunately for the pro-intellectual types, setting the price of money is absolutely impossible in this “developed economy” and your failure will be epic. Got gold?
Posted on:
October 9, 2009 10:11 AM
From: L A D,
Oh dear. What will the intellectuals do when the awakening anti-intellectuals successfully reinstate limited constitutional government, low taxes, free markets, and a return to sound monetary policies? Won't it be a shame Mr. Teitelman? Regards.
Posted on:
October 9, 2009 10:38 AM
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Wrong. End the Fed.