The Problems With the Federal Reserve -- and Its Alternatives
William Greider, author of "Secrets of the Temple: How the Federal Reserve Runs the Country", knows more about the Fed than just about anyone alive, with the possible exception of those who worked there. And that's only a possible exception. As such, his essay bemoaning the "antiquated" structure of the Fed and offering a proposal for reform should be taken pretty seriously. The key point, I'd say, comes near the top, when Greider takes aim at the Fed's vaunted independence.
Representative Wright Patman, the Texas populist who was a scourge of central bankers, once described the Federal Reserve as "a pretty queer duck." Congress created the Fed in 1913 with the presumption that it would be "independent" from the rest of government, aloof from regular politics and deliberately shielded from the hot breath of voters or the grasping appetites of private interests--with one powerful exception: the bankers.
The Fed was designed as a unique hybrid in which government would share its powers with the private banking industry. Bankers collaborate closely on Fed policy. Banks are the "shareholders" who ostensibly own the twelve regional Federal Reserve banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors in Washington to decide. Bankers also have a special advisory council that meets privately with governors to critique monetary policy and management of the economy. Sometimes, the Fed pretends to be a private organization. Other times, it admits to being part of the government.
The antiquated quality of this institution is reflected in the map of the Fed's twelve regional banks. Five of them are located in the Midwest (better known today as the industrial Rust Belt). Missouri has two Federal Reserve banks (St. Louis and Kansas City), while the entire West Coast has only one (located in San Francisco, not Los Angeles or Seattle). Virginia has one; Florida does not. Among its functions, the Federal Reserve directly regulates the largest banks, but it also looks out for their well-being--providing regular liquidity loans for those caught short and bailing out endangered banks it deems "too big to fail." Critics look askance at these peculiar arrangements and see "conspiracy." But it's not really secret. This duck was created by an act of Congress. The Fed's favoritism toward bankers is embedded in its DNA.
Greider's proposal goes a bit off the rails toward the bottom, when he suggests that Congress should recapture the mechanisms that the Federal Reserve employed in the bailout to and use them to produces hundreds of billions of new dollars for infrastructure investments. That's a dangerous game. I mean, look at our Congress.
But that doesn't obviate his analysis of the Fed's structure, or the recent swelling of its authority. One way of understanding the economic crisis is that a monetary dictatorship saved our democracy. The Federal Reserve did some things that the Congress could not have done, but it also did things that the Congress would not have done. Spending a trillion and change to buy up securities, for instance. But those were arguably the key interventions into the crisis. Comparatively, stimulus was small and slow and diffuse.
Which is to say that for a period of time, Ben Bernanke ran our economy under a monetarist's version of martial law. And the really problematic thing is that it probably worked. It may be all that saved us. You could argue that in the absence of the Federal Reserve, Congress would have been a whole lot more aggressive and responsible because Bernanke wouldn't have been there to backstop them. But would you really want to bet the U.S. economy on it?
Photo credit: Melina Mara -- The Washington Post Photo .
July 23, 2009; 7:10 AM ET
Categories: Federal Reserve , Solutions
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