MIT's Simon Johnson and Daron Acemoglu, both authors (with other people) of new books (see here and here) have a post up at the New York Times' Economix blog on the Federal Reserve Board. Not surprisingly, the two economists declare that the Fed's policy of low interest rates proves that the central bank has been captured by the dreaded Wall Street banks. More interesting, the pair erects a kind of straw-man argument suggesting that somehow the Fed has wandered out of an Eden when it was technocratically objective and independent and into one where it has been captured and bagged by those plutocrats on Wall Street. The two ask the portentous question: "But in the light of the crisis of 2008 and its aftermath, we have to ask: Has our central bank fallen back under the sway of special interests?"
Johnson and Acemoglu stir up a number of blogospheric responses, most of them dealing with the economics of all this. But first, let's focus on the historical interpretation the pair lay over all this - one that resembles the potted history of the American state and banking that Johnson and co-author James Kwak produced in their first book, "13 Bankers." This is a kind of Whig history that reads the past backwards based on current preoccupations and interests. It results in a kind of historical incoherence. How do you, for instance, combine the Jeffersonian skepticism about finance and banking (and central banking) with a New Deal belief in a strong federal regulatory presence and active economic intervention? Uneasily, at best.
In this case, the two argue, not unreasonably, that after over a century without much of a central bank, the Panic of 1907, which J.P. Morgan stepped in to quell, "convinced many people that the United States needed a central bank of some sort." This is true, of course, but wildly simplified, particularly in terms of the ideas and interests that came together in creating the Fed. Notice as well that vague "many people." In fact, the Fed was created by a profoundly establishment group with a strong Wall Street representation. Even at the time, it was widely recognized that the creation of a central bank was a victory for the East Coast, WASP-heavy, hard-money financial interests, dominated by the House of Morgan (though there was also a tinge of Teddy Roosevelt Progressivism in this classically technocratic project: Progressives socially, politically and intellectually were often at odds with Western, easy-money populists). In fact, part of the reason the Fed was structured to balance private and public interests, which the authors seem to applaud, is to allay those deep political schisms. New York got its Fed bank, which ruled the system in the early years; but so too did more populist, Western cities like Minneapolis, St. Louis and Dallas.
Acemoglu and Johnson offer a quick tour of the stock-market-crazy '20s and the Great Depression, pausing only to note that the Fed aimed at "protecting the big Wall Street firms." Again, this is reductionist to the point of absurdity. The early Fed's mission was to protect the currency and serve as a lender of last resort; there was no talk of full employment or managing markets until after World War II. The overheated stock market of the '20s was not considered the Fed's responsibility, much as Alan Greenspan, far less justifiably, passively shrugged off the euphoria of the dot-com boom. That said, the New York Fed's members were the big Wall Street firms. So this was "capture" only in the sense that the New York Fed, led by Benjamin Strong, and Wall Street thought essentially alike. Thus when the Crash came, the Fed, like the Bank of England's Montagu Norman, reacted in all the wrong ways. (There's no certainty, by the way, that simply dampening the stock market would have remedied the far deeper macroeconomic problems of the Great Depression.)
The pair then argues that Roosevelt and the New Deal regained control of the Fed from the bankers, cleaned up the banks and "pulled the central bank away from powerful bankers and further into the orbit of elected officials." Those politicians, alas, wanted to manipulate the economy (enter the Keynesians) and essentially captured the bank to get elected (enter Richard Nixon). Then came '70s stagflation, and the dragon slayer Paul Volcker, who killed inflation and restored technocratic independence to the central bank.
But how do you restore something that never, in its pure form, existed? The central bank has to act, and in acting attempts to achieve some rational coordination of policy; policy is rarely a random walk. In doing so, it establishes a view of economic matters. Only if you believe that economics is a hard science, with right and wrong answers and predictability, will you accept that the Fed is without a political bias, that is, favors one group or interest over another. "Independence" is thus a useful fiction, much like the "science" of economics. But the Fed, like journalists, can't be objective. Even in that wonderland of Volckerian independence, William Greider was writing "Secrets of the Temple," which revived the traditional schisms by interpreting Fed history up to the '80s as a continuing struggle between wealthy, hard-money financial capitalists, intent on preserving their wealth, and the debt-ridden working populace, who profit from inflation. But as fascinating as Greider's book was, his dichotomy collapsed in the Greenspan years and what the left now calls the rise of neoliberalism, with its booming financial sector (easy money!) and advancing globalization all accompanied by low inflation. Was Greenspan captured by the big banks? Johnson himself, in his famous argument of oligarchical finance, suggested that the big banks and Wall Street had captured nearly everyone in power before 2008. Is he now saying that Greenspan was a paragon of independence?
Part of the problem here goes back to the authors' chronic use of the passive voice. "Many people were convinced." Or: "The high inflation of the 1970s was interpreted by many observers as partly due to politicized central banks' trying to help their elected masters and failing to control inflation expectations." Well, do they believe those "many observers?" Who were they? And what's that "partly" really mean? Or this: "Thus was born the idea of independent central bankers, steering the monetary ship purely on the basis of disinterested, objective and scientific analysis." OK, the idea was born, but was it true? Or are they saying that it was true because "many people were convinced."
Again, complexities swamp their small boat. In his blog Rortybomb, Mike Konczal, who comes off the left, points out correctly in a post the more complex reality of "Wall Street" when it comes to monetary policy. The old hard-money, soft-money split exists, but in very complex forms, with considerable variation: It's not 1907 anymore. Wall Street is like the rest of the country: It's divided on whether the Fed should keep rates low to try to reduce unemployment or raise rates to keep (nascent) inflation at bay. This suggests that the simplistic version of capture is a crock. I'd go further than Konczal, arguing that similar tensions exist within the banks themselves and certainly among investors. Indeed, I'd add further that this resort to simplistic sociology and psychology - it's not dissimilar to reductionist class analysis - is one of the real problems with economics at its most fundamental level.
Does that mean the Fed is independent and not under the sway of one financial interest or another? I think you should assume that to be safe. But the "capture" thesis only works if it's buttressed by a simplistic historical argument anchored in the sentimental notion that a pure "independence" of any central bank in any country is remotely realistic. (And need it be said: Making the independence argument only works if you believe "correct" economics only offers one "right" answer at a time. This is a swamp.) The real task here it is to try to parse out which interests want what, and to demand some rational balance in the Fed's approach. But in an era of ideological politics shorn of reality, that's not easy. - Robert Teitelman
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