In August 2009, President Barack Obama re-appointed Ben Bernanke as chairman of the Federal Reserve, months before Bernanke’s term was set to expire. In making the announcement, the president vowed to “continue to maintain a strong and independent Federal Reserve.”
But why, Mr. President? Why do we need a strong and independent Federal Reserve?
Obama’s Treasury Secretary and former head of the New York Federal Reserve, Timothy Geithner, delivered the rationale. In an August 2009 Digg Dialogg hosted by the Wall Street Journal, Geithner defended the Federal Reserve’s opaqueness when it comes to monetary policy. “[Y]ou want to keep politics out of monetary policy,” he asserted.
But why, Mr. Secretary? Why do we need to keep politics out of monetary policy?
Didn’t our strong, independent, nonpoliticized Federal Reserve fail to prevent the mess we’re in? Didn’t the Fed’s monetary policy, which kept interest rates too low for too long, enable this recession? We need a strong and independent Federal Reserve? Really? Why?
Well, maybe we do. The putative wisdom of Obama and Geithner got me thinking. After all, if it’s a good idea for monetary policy to be free of politics and under the control of a strong, independent private cartel (even though the U.S Constitution assigns monetary responsibility to Congress*), then why shouldn’t other Constitutional responsibilities of the federal government be handled privately?
For example, why not a strong an independent military? By Obama-Geithner logic, a military junta operating outside government control would be a good thing, so that military decisions don't become politicized. Yes, a rogue army is what we need. Keep politics out of it.
Or why not a strong and independent diplomacy corps? Let lobbyists enter into treaties with other countries on behalf of the citizenry of the United States. We don't need a politicized State Department negotiating with the rest of the world, do we? Neither national defense nor national diplomacy should be political footballs, should they? Surely private interests can decide more clearly than elective office holders.
In fact, the same logic would apply to every decision. Really, think about it. Is any decision-making process improved by being politicized? Why do we need government at all? It just--yech!--politicizes the important decisions of the day. Indeed, let’s take privatization of government services all the way and establish a monarchy. If the elected legislature of a democratic republic can’t be trusted with monetary policy, why trust it with anything?
Hopefully this reductio ad absurdum of Obama-Geithner (-Bernanke) logic makes the point that there’s no real justification for putting monetary policy on a pedestal, beyond the reach of normal political scrutiny and regulation. Protestations to the contrary amount to hand waving. Indeed, given the pollution of our economy with toxic assets during the past several years, it’s clear now that public scrutiny and regulation of monetary policy are overdue.
The government monitors and regulates polluters who pour toxic waste onto public lands. Federal regulators constrain pharmaceutical companies, whose products must be deemed safe and effective before they can be dumped on the public. Why should new products developed by the financial industry not also have to pass muster, not also have to pass a test to prove themselves safe and effective, before they are dumped into the economy? Toxic assets are toxic assets, whether chemicals or exotic financial instruments. Wall Street needs to be tightly regulated along with all the other polluters and for all the same reasons.
At the macro level economists segment the economy into two sectors: Public and Private. But, to reflect the real economy, this traditional segmentation needs to be augmented by a third sector. Let’s call it the Pirate sector. The Pirate sector of the economy operates by a distinctive set of rules that distinguishes it from the other two sectors.
The Public sector consists of elected officials, at the local, state, and federal levels, and their attendant bureaucracies. This sector is subject to regulation, internally, by the system of checks and balances among its legislative, executive, and judicial branches, and externally, by the threat of discipline by voters on election day. Rightists use the epithet “Socialist” against people who advocate greater economic leeway for this sector.
Corporations and other for-profit entities comprise the Private sector of the economy. This sector is subject to regulation by the Public sector and by the “invisible hand” of the market. Market discipline means that the potential benefit of large profits is counterbalanced by the potential cost of incurring large risks. Leftists, at least traditionally, have used the epithet “Capitalist” against people who advocate greater economic leeway for this sector.
But now a stealthy third sector has lumbered from behind the scenes and into the spotlight. Let’s call it the Pirate sector. It consists of the Federal Reserve and Wall Street’s large commercial and investment banks, along with top players in the insurance industry, it seems. This sector cannot be overruled by any branch of government, not the judiciary, not congress, not the president—or at least its most powerful component, the Federal Reserve, cannot, as former Fed chair, Alan Greenspan, boasts in the video segment at the end of this post. The Pirate sector operates outside of our democratic system of checks and balances.
And this sector’s prospects for enormous profits are not balanced by prospects of incurring a corresponding enormity of risk, as in the normal Private-sector market mechanism. The Pirate sector is not subject to market discipline, because bailouts, whether directly to its financial institutions or indirectly through government insurance (e.g., the FDIC) or government bailed-out private insurance (e.g., AIG), take risk out of the equation.
The Federal Reserve cannot be disciplined by the market and cannot be overruled by the elected government. It and its orbiting financial services partners constitute a distinct third sector of the economy, with the fed setting monetary policy and the for-profit financial industry cashing in on that policy. Fed bailouts shift the risk to the taxpayer while executive compensation policies keep profits private.
In the WSJ/Digg Dialogg, Treasury Secretary Geithner says that the fed’s current level of transparency is adequate, that the fed’s actions (outside of making monetary policy) are on public display and that people can judge for themselves whether it is acting responsibly. Great. What good does it do to judge an institution as acting irresponsibly if NO ONE can overrule its policies? Former Fed head Alan Greenspan brags: NO ONE has the authority to overrule the decisions of the Fed. A totalitarian dictator by any other name . . . .
The corruption of the U.S. monetary system cries out for sweeping reforms. One way to restructure the system fundamentally would be to convert the banking industry into a public utility. The elected Congress should re-assert its Constitutional prerogative to determine monetary policy and issue real dollars, instead of Federal Reserve Notes (I.O.U.’s owed to private for-profit banks), at fixed interest and use the interest collected to offset the tax burden that weighs on the public. “Capitalists” might complain that government should not get into the banking business. But more to the point would be the corresponding “Socialist” complaint that banks need to get out of the governing business.
*With the passage of the Federal Reserve Act in 1913, Congress abdicated its monetary responsibilities and conceded monetary authority to a private banking cartel, the Federal Reserve.