Thursday, April 5, 2012

Who Captured the Fed?

A hundred years ago, monetary policy – control over interest rates and the availability of credit – was viewed as a highly contentious political issue. People on the left of the political spectrum feared the central bank would be used to prop up Wall Street banks; those on the right thought it would unduly expand the role of government, giving too much power to politicians.

In the 1980s we entered a phase in which the Federal Reserve, along with other major central banks around the world, was seen as independent and run by technocrats supposedly immune from political pressure.

But in the light of the crisis of 2008 and its aftermath, we have to ask: Has our central bank fallen back under the influence of special interests?

The origins of the Federal Reserve System lie in an emotional debate, conducted more than 100 years ago, about whether the government should seek to affect interest rates – and support the credit of Wall Street firms during times of crisis – and, if so, how.

The Panic of 1907 convinced many people that the United States needed a central bank of some kind. A complete collapse of the financial system was too scary a prospect. But there was also a longstanding American aversion against ceding too much power to big banks. Read More