Where does Private Lenders stand? Would we want to return to a world free of interest-rate meddling by the Fed?
So what do we think of the Federal Reserve, the people who run it, and the role it plays in setting short-term rates and even influencing investment portfolios?
While the modern Fed has its supporters, the detractors seem to get most of the ink.
As veteran financial journalist Roger Lowenstein wrote in a recent column for The Wall Street Journal, “No federal agency, except the Internal Revenue Service, is held in lower regard than the Federal Reserve, according to public opinion surveys. The left accuses the Fed of being too cozy with banks; the right says it is planting the seeds of a massive inflation.”
Sen. Rand Paul (R., Ky.), an outspoken critic of the Fed, wrote in a recent Journal op-ed: “The master fallacy underlying so much economic commentary is to imagine that a handful of experts in Washington should be setting the price of borrowing money.”
The never-ending debate about the worthiness of the Federal Reserve and the economists who run it has received some fresh oxygen in the form of two news books: Lowenstein’s America’s Bank: The Epic Struggle to Create the Federal Reserve and former Fed chair Ben Bernanke’s A Courage to Act, his memoir about the financial crisis.
Both books have triggered a fresh round of discussion about the modern Fed, and I’ve chosen to call out some of the more interesting reactions.
In his op-ed piece, Sen. Paul, a GOP candidate for the presidency and a self-professed libertarian, argues that the monetary policy function shouldn’t even be the Fed’s job: It should be the work of the free market.
“The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth,” he writes.
But would we want to return to a world free of interest-rate meddling by the Fed?
In a recent article in the New York Times that explores the new Lowenstein book on the Fed’s origins, writer Adam Davidson takes us back to the free-wheeling times before the Fed came to be.
“The decades leading up to the Fed’s creation were punctuated by repeated financial crises, culminating in the ferocious panic of 1907,” Davidson writes. “The shortage of cash was so great that, as Lowenstein puts it, the nation seemed to be ‘reverting toward barter.’ These disruptions may have been severe and frequent, but they were largely problems of liquidity, not episodes of widespread insolvency. Lowenstein explains how harvest season routinely produced financial turmoil. Without a centralized mechanism to adjust the supply of currency or to lend to solvent banks experiencing liquidity pressures, the demand for money to pay workers and to finance the purchase of agricultural goods drove interest rates up and reduced the availability of credit. This stifled growth precisely when it should have been accommodated.”
Davidson adds that “Lowenstein contrasts the relative stability of the major European economies with American financial instability during the period. He shows that the United States needed what Europe had, but we lacked: a central banking arrangement that could mobilize reserves across the entire system, to serve as lender of last resort to solvent banks and to provide an ‘elastic currency’ that could be expanded when demand for currency increased or contracted when times became too frothy.”
Fast forward to the Fed in recent times. In his new book, Bernanke gives a blow by blow account of his role in handling the 2008 financial crisis that had the potential to inflict more damage on the economy than came to pass.
In his review of the Bernanke book on the Politico Website, Zachary Karabell, head of global strategy at Envestnet and a regular contributor to Barrons.com’s Wall Street’s Best Minds column, makes the case for both Bernanke and the Fed during challenging times.
He writes that “Bernanke and the Fed were the grown-ups in the room during a period of crises unprecedented since the Great Depression, regardless of whether you believe they have conducted themselves brilliantly or poorly.”
As he puts it, “the larger message is that Ben Bernanke is a wonk, an academic, a policy economist and a central banker who utterly lacks the arrogance and self-aggrandizement so evident in so many in Washington. He came to the Fed with a low-key, low charisma mien, and he left the Fed with that largely intact. He also did some truly extraordinary things under pressure, especially, for a fairly conservative, Republican-appointed Fed chief, and often in defiance of political expedience.”
Though Karabell’s column focuses on Bernanke, many of his comments seem to apply to Bernanke’s successor, Janet Yellen, and many of the other earnest economists who crunch the data and seek to use monetary policy to stabilize both the economy and financial markets.
If the inflation zealots are right about the Fed’s propensity toward super-low interest rates, where is the inflation after all these years of cheap money? Why is unemployment rate at a low 5.1%, on the cusp of the standard definition of full employment? And why is gold, a classic inflation hedge and harbinger of doom, in the doldrums?
As Lowenstein adds, “it is hard not to conclude that the Fed is doing at least a reasonable job.”
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