Fed Up

The political movement to curtail the Federal Reserve goes from fringe to mainstream.

(Page 3 of 4)

But the profound effects of the Fed’s avowed purpose—manipulating interest rates and making paper currency—are damaging enough, at least for those who see its fingerprints all over the current crisis, to make more baroque conspiracy theorizing superfluous. And when it comes to mistrusting the Fed, the Alex Jones crowd is not alone. 

We’re All Austrians Now

Economists, pundits, and financial analysts are not exactly gathering by the hundreds in front of Federal Reserve buildings and chanting “End the Fed!” But it has become almost impossible to avoid respectable voices in respectable venues laying some of the blame for the economic crisis at the Fed’s discount window. 

The Berkeley economist Brad DeLong, a popular blogger and former Clinton Treasury Department official who once dismissed Mises’ general monetary theory as “batshit insane,” still told this story in the October 2008 issue of the liberal American Prospect: “The current financial crisis has its roots in Greenspan’s decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession.…Six months ago, I would have said that his judgment was probably correct. Today… I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s.”

Fed bashing in a roughly Austrian style has gotten so popular that the theory’s opponents now feel embattled. Scott Sumner, a monetary economist at Bentley University who writes the much-cited blog The Money Illusion, thinks the Federal Reserve was and is too tight with interest rates and money for optimal economic performance. “As everyone knows by now,” Sumner complained in June, “the once kooky and discredited Austrian business cycle model has now become conventional wisdom.” 

Blame-the-Fed sentiment now stretches across the spectrum of economic thought, from Keynesians such as DeLong to monetarists (who generally want the bank to maintain a fixed rate of money supply growth). In October 2008, the monetarist Anna Schwartz, co-author with Milton Friedman of one of the most important books of monetary economics, A Monetary History of the United States, told The Wall Street Journal: “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object.”

In February 2009 the Stanford economist John Taylor, a monetary whiz so influential that there is a rule for setting interest rates named after him, told The Wall Street Journal: “The Fed held its target interest rate, especially in 2003–2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust.”

Even the Obama administration has gotten into the act. “Monetary policy around the world was too loose too long,” Treasury Secretary Tim Geithner told PBS interviewer Charlie Rose in March. “And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”

As with any issue in political economy, there’s disagreement. There are a variety of arguments to parry or blunt the Austrian theory. Former Federal Reserve Board economist Arnold Kling, for instance, argues that the modern world of money and credit is so convoluted, with so many avenues for the creation of money-like instruments outside of direct Fed control, that the Fed shouldn’t be seen as the main villain in any credit-driven collapse. At worst, Kling thinks, it’s a hapless bungler pretending to power it can never have. Bryan Caplan, a libertarian economist at George Mason University, thinks people are generally too smart to be fooled enough by false interest rate signals that they precipitate an economic crisis.

And pinning even partial blame for the current economy on the Fed is different from questioning its legitimacy. By limiting his bill to the narrow question of transparency, Paul is making it possible to create a broad political coalition that can agree the Fed needs to be kept in check without necessarily agreeing on why, or on what the Fed ought to be doing.

The Fed Forever?

Despite the palpable momentum behind H.R. 1207, the idea of inconveniencing the Fed with anything more severe than an audit still seems like a far-off fantasy. Meltdown author Woods notes that, although many mainstream analysts are jumping on the Austrian bandwagon to explain the causes of the crisis, none of them are really embracing the Austrian solution of ending the Fed’s power to manipulate interest rates at will. They just call for the power to be used more prudently next boomtime.

The Fed was an ideological and institutional response to a convincingly told story of crisis and solution—basically, that the 19th-century system of mostly private banks issuing their own mostly gold-backed paper was leading to too many small economic crises of the sort that used to be called “bank panics.” Milton Friedman, a critic of central banking practice, at the same time dismissed attempts to return to a commodity standard such as gold. One of his reasons was that it was “not feasible because the mythology and beliefs required to make it effective do not exist.” But with best-selling books, activists in the street, members of Congress, and economists across the ideological spectrum casting aspersions on Fed practice, we may see the crafting of a new set of myths and beliefs.

In this time of political ferment, Stephen Axilrod, a longtime Federal Reserve staff director and monetary policy guru, has issued a memoir from MIT Press titled Inside the Fed. Axilrod admits that Fed interest rate actions precipitated the crisis without letting that fact dent either his admiration for the institution or his belief in its necessity. Still, Axilrod notes something that should encourage Fed skeptics of all varieties: that “a country’s monetary policy is almost necessarily limited by conditions generated from the political, philosophic, and social ethos of the time.”

We are now seeing attempts to move the ethos in an anti-Fed direction. While it’s hard to imagine an America without an institution that has become so central, it’s interesting to contemplate something former Rep. Eldridge Spaulding (R-N.Y.) said in 1868, in the midst of the legal controversy over Civil War greenbacks: “No one would now think of passing a legal tender act making the promises of the Government…a legal tender in payment of ‘all debts public and private.’ Such a law could not be sustained for one moment.”

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Suki||

    Now I am aware of the transparency part and that sounds good. I am still not getting abolishing the central bank part. Need to read that in more depth.

    Thank you Brian!

  • ||

    Do you believe in free markets? Then why is something so fundamentally economic (interest rate) not left to the markets? 'nuff sed.

  • ||

    Actually, the interest rates are mostly left to the markets. What the Fed controls is the federal funds rate, which is the rate banks loan to other banks.

    Other than an indirect influence via inflation, your home mortgage rate has nothing to do with the Fed.

  • ||

    As stated, that's a completely incorrect and asinine statement. The discount rate does indeed influence the prime rate which influences mortgage rates.

    At best you can say the Fed doesn't directly influence rates other than the discount rates, but you can hardly credit the fed for keeping mortgage rates low as that great Disney economist PK does then say they don't influence the interest rate.

  • ||

    Another good book is The Creature From Jekyll Island

    It looks like HR1207 is going to be incorporated into the new banking regulations being proposed. If the Fed is going to be made this new "systemic risk regulator", Frank has indicated, along with many other Reps, that that will only happen with a complete audit of the Fed, although this is all still up in the air.

    I believe the co-sponsor count is 307. Rep Alan Grayson (D-FL) was responsible for bringing on over 100 Democrats. However, the Senate version, S604, authored by Bernie Sanders, only has 30 co-sponsors. But that's up from 20, last month.

    I was watching the Banking Committee hearings on HR1207 (I don't have a link, go to C-SPAN and search it), and the biggest opponent was Rep. Mel Watt (D-NC). I did a little fact checking on Mr. Watt. Mr. Watt's constituency is Greensboro, NC. Sound familiar? BoA corporate headquarters is in Greensboro. Then I checked his campaign contributors. In 1998, his top 4 contributors were Labor Unions. Not surprising, for a Democrat. But, in 2008, his top 4 contributors were BoA, Wachovia, American Express, and some Banker's Association (not the ICBA). I thought that was very interesting.

  • Kolohe||

    BoA corporate HQ is in Charlotte not Greensboro.

    (Jefferson Pilot is (or used to be) in Greensboro)

  • ||

    My mistake, his constituency is Charlotte. For some reason I got Greensboro in my head. Wachovia is in Charlotte, also.

    http://watt.house.gov/Supporti.....12_109.pdf

  • ||

    My memory isn't what it used to be. It was only a couple months since I checked this guy out, so I went back and double checked:

    2008:
    1 Bank of America $14,500 $6,500 $8,000
    2 Wachovia Corp $12,500 $2,500 $10,000
    3 American Express $11,000 $1,000 $10,000
    4 American Bankers Assn $10,000 $0 $10,000

    1998:
    1 AFL-CIO $10,500 $0 $10,500
    2 American Federation of Teachers $10,000 $0 $10,000
    2 American Fedn of St/Cnty/Munic Employees $10,000 $0 $10,000
    2 Assn of Trial Lawyers of America $10,000 $0 $10,000

    Ahhhhh, those dreaded trial lawyers.

  • Thomas||

    Damn right. I don't want the only publicity my city gets on this site to be false accusations of corrupt politicians/banks.

  • ||

    I take it you're from Greensboro? My apologies. It seems I had a Freudian slip. My ex-girlfriend lives in Randleman, NC. She's coming up next month for my class reunion.

  • ||

    You're going to need 290 votes in the House and 67 in the Senate to overcome His Hopiness' veto.

  • ||

    True but even barring that number it will be good to force him to veto to protect his masters.

  • ||

    When we talk about the Fed's "independence", are we talking about the government (POTUS and Congress), or the financial institutions they are supposed to regulate and "oversee"?

    Wasn't it then NY Fed President Tim Geitner that orchestrated the deal between JP Morgan to absorb Bear? Wasn't JP CEO Jamie Dimon on the Board of the NY Fed at the time? Isn't there some sort of "conflict of interest" in there?

  • ||

    He was appointed to a new *14* year term, not a new 4-year term; "Though he was appointed to a new four-year term in August...."

  • ||

    "Greenspan, who enjoyed the longest stretch of low-inflation prosperity in Fed history "

    Brian, Given the number of austrians who will read this article wouldn't it make sense to say "low-CPI growth prosperity" or somewhow make an attempt to point out that asset(house,internet stocks) inflation and fiat monetary growth were very much a part of Greenspan's tenure even thought the Mainstream economist used the slow CPI growth as their happyfeelgood # to ignore the real growing problems of malinvestment?

  • LibAnCap||

    "It certainly was no credit to the anti-Fed movement that Holocaust museum shooter James von Brunn had previously been arrested for attempting a “citizen’s arrest” of the Fed’s governors."

    I never understand why this type of comment needs to be there. The same thing can be said about any political train of thought, in regards to nut-jobs who happen to beleive the same thing.

    I guess anyone that is a vegetarian can be associated with Adolf Hitler and the Holocaust?

  • ||

    The fed will fall when liberals finally realize that keeping low interest rates to fund their big-government spending encourages overconsumption and environmental destruction. Their heads will explode.

  • ||

    George W Bush was a Liberal?

  • Jordan||

    Don't tell me you're surprised by that. Bush was only conservative on abortion and gay rights.

  • ||

    I still don't know what GWB was, and I've given up trying. What's it's come down to in this country, is which industries (or specific companies) does the President, whoever he may be, support, and which social programs will get him the most votes.

    However, it always seems to come down to "it's the economy, stupid". The economy today. "Are you better off today...". That's where the conflict comes in between the President and the Fed.

  • ||

    Bush-meister was not liberal nor conservative. He was nothing. An empty shell of a man steered by special interests.

  • Tsu Dho Nihm||

    I think GWB was an authoritarian. I can't think of a single thing he did (or even proposed) that furthered individual liberty.

  • Some Poster||

    I think that's a little inaccurate. He furthered liberty away from the grasp of citizens, didn't he?

  • ||

    He massively increased spending and regulation and started the bailouts. What was not liberal about Bush except the war?

  • Jim||

    While I enjoy the cognitive dissonance of this as much as the next (libertarian) guy, one of the trademarks of the liberal elite is that they think they are capable of managing the fine lines between 'stimulation' and 'overconsumption', and can achieve bursting economic growth with sustainable environmentalism. So, unfortunately, no such brain splatter will be had over this realization....

  • ray||

    WOW... what a crafty little hitpiece posing as praise!
    well done Brian.. I never credited you with being that subtle. Worthy of a true Hit&Run;

  • ||

    WW 2 vet, Von Brunn, walked into the Washington headquarters of the Federal Reserve System on Dec. 7, 1981, armed with a revolver, a hunting knife and a sawed-off shotgun. Claimed he wanted to take board members hostage to focus media attention on their responsibility for high interest rates and the nation’s economic difficulties. He was convicted in 1983 and served six years in prison for attempted kidnapping, burglary, assault and weapons charges."

    So he was in favor of greater monetary expansion! obviously not a austrian...sounds more like a militant Keynsian...why not smear keynsians as being white supremeicist nuts? or vets? sounds like bias Doherty. I wonder why the Feds let him out of prison so quickly?...was he working for the feds as part of a deal? perhaps he was under their control and this was part of their smear campaign?

  • LibAnCap||

    Doherty spends 4 pages talking about how the business cycle explains the crisis...nothing will be done to end the fed and still manages to slip in the remark about the nut job Holocaust shooter.

    Of course Reason can't fully praise Ron Paul. It is against their true nature. He is not hip enough on the important issues like gay marriage, drug use and porn.

  • ||

    Actually Paul is for decriminalization and pretty string 1A guy.

    The big problem with Paul is abortion, which I share but can overlook considering the overall package.

  • BakedPenguin||

    Yeah ray, it was so craftily done, only a tinfoil hat wearing paranoid nutjob could have found it. Good job, especially pointing out where the "hits" were.

  • ray||

    put on your normal person hat for a minute and read it. skip over the boring econ bits as any memeber of the general public would... focus on the people mentioned and the adjectives used. It doesn't take a masters in marketing to see the image being sold here..

  • BakedPenguin||

    The main takeaway I got from the piece:
    Criticism of the Fed, once a fringe position, is now mainstream. However, it's unlikely any real reform will take place.

    You're either much better at reading subtext than I am, or hypersensitive.

  • ||

    Great research on all the fair and open debates that congress held on the Fed leading up to 1913. I never knew how open and transparent Senator Aldrich was...what a great guy!

  • ||

    It's awesome that so many politicians actually recognize how intelligent Ron Pual is, yet just brush off his ideas.

    Also good article, I want the Federal Reserve out of here and the gold standard back.

  • ||

    That would be the tastiest red meat for the opposition EVER if The Anointed One were to be politically foolish enough to veto Fed transparency. It would become a major theme for attack ads in 2010 and 2012.

  • ||

    Why haven't the Obama daughters taken Swine Flu Vaccine? really why?

  • ||

    Pro-Fed, Anti-Fed; if we don't get our nation's financial house in order, restrain politically profitable government spending, reduce the power of bureaucratic rule-makers unaccountable to the electorate, and get more folks working and fewer on the dole, the Fed will be replaced. Willy-nilly, politically and economically we are heading for a major and potentially violent change in our nation, driven by President Obama's radical agenda of personal power grounded in his cult of personality. Either we restrain the forces of choas being unleased or they will destroy our nation in all ways.

  • John and Dagny Galt||

    Dear Brothers and Sisters, Sons and Daughters of Liberty,

    There are only two types of human beings.

    One type just wants everyone to leave everyone else alone and these humans are students and advocates of the Philosophically Mature Non-Aggression Principle.

    The other type refuses to leave others alone and these humans are the Mobocracy Looter Minions with their hords of bureaucrats, jackboots, and mercenaries that perpetuate the perpetration of the loot and booty gravy-train. Rob-peter-to-buy-paul's-vote bread and circuses of the doomed Amerikan Empire.

    You are either the one...or the other.

    The John Galt Solution of Starving The Monkeys is the only solution. Stop funding and forging your own chains and shackles. What are you leaving for your children and grandchildren and prodigy!?!

    The Mobocracy Looter Minions must be allowed to consume everything around them, then each other, and finally themselves. There is no other way. Ayn Rand wrote about it over fifty years ago and it rings as soundly today as it did then.

    Get your copy of Starving The Monkeys by Tom Baugh today, before the book is banned and the author is hunted down and Vince Fostered!

    Sincerely,
    John and Dagny Galt
    Atlas Shrugged, Owner's Manual For The Universe!(tm)

    http://www.starvingthemonkeys.com/

    http://voluntaryist.com/fundam.....uction.php

    .

  • ||

    What are you leaving for your children and grandchildren and prodigy

    Dude.. that's just embarrassing.

  • ||

    progeny?

  • Fiscal Meth||

    Ike, you're basically right but John Galt(if that is your real name) is super duper right. With a fiat economy, something will probably replace it. That's why the gold standard is so important. Not because it is gold but because gold is rare and durable. It simply can't be inflated by anything short of alchemy. You can only increase its value by producing goods faster than they are consumed (which is good) or decrease it by doing the opposite(which means people are too stupid and lazy to survive which isn't the case as evidenced by our existnce). That is poison for big government. It makes it impossible to feed off of us while claiming to take care of us. and that is why it is quickly squashed. Not because it doesn't work but because it does and that is why some founders of this country threatened not to even sign the constitution unless it banned paper money...Which it did!

  • Jeff||

    I predict that if the Fed is subjected to an honest and complete audit, and the results are made public, it will be exposed for what it is; a pack of corrupt gangsters.

  • Flex Nasty B.I.G.||

    The key to understanding Austrian Business Cycle Theory is to first understand time preferences.

    Basically, the idea is that simply by saving money, you send a market signal indicating your demand for higher-order goods. (those which require lots of capital, years of lead time to develop, etc.)

    Conversely, by *not* saving money you send a signal that you *don't* demand higher-order goods, because you're too busy meeting your immediate needs.

    Here's how it works: when you save money, that increases the supply of money available for lending. That increase in supply results in lower interest rates. At those lower rates, capital-intensive, long-term investment projects now become more viable. Voila - customer demands higher-order goods, customer gets them.

    Again, the opposite holds true as well. When saving rates drop, interest rates go up, which makes those multi-year, multibillion-dollar investment projects a lot less viable.

    At least, that's the way it should work, according to Austrians. It doesn't work that way now because the Fed effectively sets interest rates centrally, instead of allowing them to float naturally according to supply and demand. And, say the Austrians, that sends all sorts of horrendous shock wave effects throughout the economy.

    I don't buy all of ABCT thus far, but time preferences make a tremendous amount of sense to me.

    (someone correct me if I misstated any of that, or if there is a logical fallacy in the theory.)

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    Well sometimes we have to choose the lesser evils I guess.

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  • abercrombie milano||

    My only point is that if you take the Bible straight, as I'm sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won't get the full deal by just doing regular skill english reading for those books. In other words, there's more to the books of the Bible than most will ever grasp. I'm not concerned that Mr. Crumb will go to hell or anything crazy like that! It's just that he, like many types of religionists, seems to take it literally, take it straight...the Bible's books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on...the Bible's books were written by people with very different mindsets...

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