The publication of former Federal Reserve Chairman Ben Bernanke’s book, “The Courage to Act,” has brought out a lot of commentary and criticism of the Fed — some of it reasoned and some of it the other kind.
The worst of the criticism plays into the hands of the conspiracy theorists who believe that the Federal Reserve was deliberately created as a secretive banking cabal that would control the U.S. economy to further its own interests, primarily greed. And in their view, the Federal Reserve System was deliberately made so complicated that ordinary mortals cannot understand it.
Pursuing this view, the New York Times headline for an article by Adam Davidson reads, “You’re Not Supposed to Understand the Federal Reserve.” And Michael Kinsley, in his review of Bernanke’s book, writes that, “Except for a few cranks and obsessives, almost nobody can even explain how it works, let alone develop an informed opinion about the policies that emerge from it.”
There seem to be only three possible categories for an informed individual, then. One can be a crank, an obsessive, or an almost nobody. Possibly the thousands of economists, bankers, money traders and Wall Street drudges who do understand how the Fed works should be informed as to which category they fall into before their lack of self-knowledge causes misery of some sort to themselves or their loved ones.
It is an ordinary view among students that any subject they find boring must be difficult to understand. And it is an easy dance move from that view to the idea that someone had deliberately made the subject difficult to understand in order to further their own interests — including the obvious one of making students’ lives miserable.
There is no doubt that the organizational structure of the Federal Reserve is boring. It will never, ever, be the basis of a Hollywood movie or a Broadway musical. Still, it is not difficult to understand.
The boring structure of our Federal Reserve is very different from the boring structure of the central banks of Europe or Britain. It is as different from them as our history and our political structure is different from theirs, and that is not a coincidence. The history of our distrust of banks in general and a central bank in particular goes back to the founding fathers.
That distrust was not totally misplaced. Banks did not always behave well, and their key role in farming, which is dependent on cyclical, recurrent financing, was an open sore in our political differences — including the ones that plunged us into the Civil War.
In the decades after that war, the periodic financial panics that accompanied our Industrial Revolution made it clear that we had to restructure our financial system. The head-banger puzzle, though, was how to design a system that could not be monopolized by the “captains of industry” who ruled vast economic empires, and could not be used as a political tool to allow one region of the country to exert its will over the lives of all the others.
The Federal Reserve was designed to create a balance between regional interests and, equally importantly, to keep it out of the hands of the Congress or the President. It seemed impossible to do this, but the increasing intensity of the financial panics (just as Marx predicted) scared the impossibility out of us and the Federal Reserve Act was signed into law by Woodrow Wilson in 1913.
One hundred and two years later, the organization of the Federal Reserve is still boring to most people and a cabal to others — but it is a structure that continues its independence from Congressional politics. That has not eliminated differences of opinion, but dissenting views are generally voiced at the board meetings and operational committee meetings that decide monetary policy. The public can read about these opinions and views in the published minutes of the meetings.
The Fed’s control of interest rates is indirect. It doesn’t order banks to raise or lower rates, but achieves these changes through the financial markets where it buys or sells Treasury securities depending on which direction it wants to take the economy. The system may be boring to some people but it is understood by large numbers of decision-makers and people who work on the front lines of the financial markets.
The Federal Reserve is not a perfect system but there are few secrets in it. More importantly at this point, though, is that its policies and actions are driven by imperfect information as to what is really going on in our economy. We should worry less about conspiracies and cabals, and more about that problem. It’s very likely at the top of the Fed’s worry list.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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