Of the Federal Reserve and Dreams of Success

Photo by Tyler B on Unsplash

It may be easy, but I think unfair, to fault the Governors of the Federal Reserve System.  Their task is more than they can handle, and yet they are required to do it.  More accurately, I should say that their tasks are more than they can handle, and yet they are required to do them.

When the Fed was created, more than a century ago, a big concern was that it would be dominated by the financiers of New York and the politicians of Washington.  Hence, rather than a central bank, it was born as a system of a dozen regional banks, with a limited focus, to offset the liquidity risk inherent in banking.

Over time the Fed has not stayed that way.  Today, the Federal Reserve is effectively the biggest bank in the world.  Financiers in New York have an outsized influence, but the influence of the politicians in Washington may be greater.  Otherwise, how could a federal republic tolerate a handful of people at a single agency having so much sway over the daily lives and future prosperity of the individuals, families, communities, and businesses in the 50 States of the Union?  Accountability to the elected cannot long be withheld.

A great problem has been that the elected do not refrain from giving the Fed more things to do.  Its one first task has lost its focus by becoming three.  By law, the members of the Board, joined by the presidents of the 12 Fed banks, are to conduct themselves “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

What if they cannot succeed?  Then we fault them for failures while still pretending that they can.  We hide the goal posts in fog.  What is “maximum employment”?  Can it be today’s 62% of the adult population when we began the 21^st Century at 67%?  What are “stable prices”?  Does “stable” mean that the price of food tomorrow will be the same price it is today, or is “stable” the Fed’s official goal that things will cost 2% more each year, so that my young son’s retirement will require nearly twice as much as mine does?  Then there is the third, often forgotten requirement, that interest rates be “moderate.”  For 10 years the Fed kept quiet about that legal mandate, keeping interest rates very close to zero, a huge transfer of wealth from savers to borrowers, Uncle Sam being the world’s biggest borrower.  Is it surprising that the federal government’s debt grew during those 10 years to $30 trillion and still swelling?

What is the Fed to do?  We cannot reproach its current team, because they cannot succeed.  No government agency, regardless of excellent economists and the best computers, can manage it all.  If you read the statements, they carefully admit, essentially, “we don’t know how to succeed, but the law says we have to do something, so we will try this and that and see how it goes.” Meanwhile, it has not been going so well.  To paraphrase liberally from psychiatrist Anthony Daniels, we should not be so beguiled by the dreamy tasks we have placed on the Fed that we cannot bear to lighten the load merely because it is not working.