What Could Go Wrong?

I've written at some length about my mixed feelings toward Federal Reserve Chairman Ben Bernanke. While I think that he was heroic in the face of the End pof the World back in September 2008, there are few things as deeply concerning as his QE2 program to battle the recession. It creates an enormous potential for runaway inflation that would be brutally painful to stop.

It's important to remember that the Great Inflation of 1963-82 was only stopped by a deliberately created recession that was every bit as bad as the one we're in now. The unemployment rate was higher than it is now, and there was a very real possibility that Paul Volker and Ronald Reagan would be among those losing their jobs. It worked in the end, but the cure was almost as bad as the disease.

There's also some question as to whether tinkering with the money supply is actually going to end the recession. In recessions prior to 2000, the United States had a manufacturing sector that provided jobs that were lost once consumer demand was restored.

That's not true today. Since the mid-90s or so, the American economy has been riding a series of bubbles; first in technology, then in stocks, then in home mortgages. But manufacturing, where most middle-class jobs are, was sent overseas in a series of trade deals. Nobody, Bernanke included, knows where the lost jobs are going to come from this time. Qualitative easing might just wind up creating massive inflation without solving unemployment, which is what the late 1970s looked like. Deliberately creating another recession to break that inflation might be enough to throw the economy into a depression.

Having said that, there are few things as entertaining to me as when people who don't know what they're talking about are polled about very complicated situations. That almost never fails to make me smile. And this poll is better than most. It proves that most Americans have no earthly idea what the Fed actually does, which doesn't stop them from opining on its future.

A majority of Americans are dissatisfied with the nation’s independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright, a poll shows.

The Bloomberg National Poll underlines the extent to which the central bank’s standing has suffered as it has come under fire in Congress, first from Democrats for regulatory lapses before the financial crisis and then from Republicans for failing to revive an economy in which the jobless rate hovers near 10 percent. Voters from both parties have criticized the Fed’s $3.3 trillion in aid to the financial system.

(...)

Americans across the political spectrum say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo.

Let's address each of these possibilities individually. C'mon, it'll be fun!

One can reasonably assume that the people who want to abolish the Fed are hardcore libertarians or particularly stupid Republicans. They believe that private banks can perform the functions of the Federal Reserve, despite the fact that they never have before.

The Fed, as we know, is supposed to regulate the money supply, primarily through interest rates. Private banks, on the other hand, exist to make money. History is instructive on this point. Prior to the 1913 creation of the Fed, the United States went through regular depressions. Depressions, not recessions. There was one about every twenty years or so, and financial panics occurred much more frequently. Notice how the last depression was over seventy years ago? the Fed had a lot to do with that.

Also, I don't remember anyone being overly impressed with the performance of U.S banks over the last few years. Do you really want them doing for the money supply what they did to the housing market? The government didn't do a stellar of regulating the banks to begin with, which goes a long way in explaining how the United States got where it is. Is giving the banks even more unsupervised responsibility to do the right thing really a good idea?

Taking away the Fed's independence and making it more accountable to Congress sounds great in theory. The United States is supposed to be a democratic republic, and agencies should be answerable to the people's representatives, right? Wrong. Like most things that are great in theory, it would be nothing short of a disaster in practice.

Firstly, Congress has the ultimate form of accountability over the Fed: the power of impeachment. As "officers of the United States", the Chairman or the Board of Governors can be removed by Congress whenever Congress sees fit. It would just be really, really hard, which is why nobody wants to bother. Doing hard things is a pain in the ass and who wants to be bothered?

Congress also hasn't been celebrated for it's sense of responsibility, as evidenced by fifty years of deficit spending. Politics is increasingly little more than a popularity contest, and the currency is actually pretty serious. Do you really want clowns like Jim DeMint or Chuck Schumer determining how much money should be pumped into the economy? Really? Are you sure that they wouldn't turn the United States into Zimbabwe faster than they already are? More importantly, these people are singularly unable to resist the lucre of scumbag banking lobbyists now. Imagine what it'll be like when they have their hands on the money faucet.

Look, there's more than enough blame to go around for the mess that is the American economy. Consumers and voters were greedy and stupid, the banks were evil and stupid, and the politicians were craven and stupid. The crash is everybody's fault, but nobody wants to admit it. So the Fed - isolated and unknowable as it is - takes one in the nuts. But that doesn't make it right or wise, just expedient.

Doing crazy things when times are bad is more likely than not just going to make things worse. That's doubly true when it's being driven by an angry and ignorant public. The people who were polled by Bloomberg are the same people who used their houses as ATM machines and thought it would end well. They're the same people who elected the Congresses and the child presidents that stood around and let everything go to hell over the last fifteen years.

If you've ever wondered how I became such a misanthrope, now you know. I read a lot of public opinion polling.