Raising the Standard.

Our Monetary Leviathan

The Creature from Jekyll Island. (Photo: rlinger)

Last Wednesday, President Barack Obama formally nominated Janet Yellen to chair the Federal Reserve in place of the departing Ben Bernanke. Ever since the assumed-frontrunner Lawrence Summers withdrew from consideration several weeks ago, the media and general public have been doing their homework on Yellen to forecast what kind of monetary regime she would implement if selected.

Unsaddled by the Wall Street background that angered many on the left and likely torpedoed Larry Summer’s nomination, Yellen will almost certainly be confirmed by the Democrat-controlled Senate.

Objections to the prospect of Yellen’s leadership have come largely from the right, in particular for her support for continuing the loose money policies that have characterized the last several years of the Bernanke reserve. Nevertheless, a protracted nomination fight does not seem likely.

Whether or not Yellen is misguided in her dovishness cannot be known for some time, but it is clear she is poised to assume a position of great importance. A recent Economist headline identified Yellen as, “A new hand on the tiller” of the economy. Federal Reserve policy does indeed have an outsized effect on the U.S. and world economy. Rather unfortunately, this fact has tended to simply inform policy discussion rather than being a subject of debate in its own right.

Chartered in 1913, the Federal Reserve was originally intended to serve as a lender of last resort to banks. In the preceding decades, a series of credit crises caused by burdensome government regulations had wracked the U.S. economy; the Federal Reserve system was justified as a way to prevent financial crises by loaning to otherwise sound banks that were unable to obtain other lines of credit.

The limited role articulated by the 1913 legislation and the Federal Reserve’s early proponents has long since disappeared. Today, the Federal Reserve is in almost complete control of the nation’s money supply through its open market operations, affecting lending practices throughout the entire economy by manipulating interest rates. In addition to its control of the money supply, the Federal Reserve is also tasked (in legislation succeeding the 1913 act) with promoting “maximum employment, stable prices, and moderate long-term interest rates,” further cementing its power.

The United States has undoubtedly grown wealthier and more prosperous since 1913, something proponents of the Fed are quick to point out. But simply invoking this coincidence as proof that the Federal Reserve is necessary and beneficial is unconvincing: the New England Patriots signed Georgia’s David Greene in 2007 and then proceeded to win 18 straight games, but no one signed him to a seven-figure contract.

Unlike Greene, who by all accounts toted clipboards admirably, the Federal Reserve has been less successful.

Instead of ending the U.S. economy’s susceptibility to financial crises, the Fed has been on hand for such debilitating setbacks as the Great Depression, the savings and loan crisis of the 80’s and the recent financial crisis of the late 2000s.

As for price stability, the Fed has tacitly supported three percent inflation for decades.

And with seven percent unemployment quickly becoming the status quo, the task of maintaining full employment also seems to have eluded our central bank.

Perhaps Janet Yellen has what it takes to manage an economy with hundreds of millions of people making trillions of decisions a day, as George Will recently put it. Perhaps Republican Senator Michael Crapo is correct that quantitative easing is dangerous and distortionary. Either way, the legitimacy of the institution itself continues to draw less scrutiny than any of its individual policies.

THE EDITORS: If central planners are not to guide us, who is?

If history is a guide, it is time to stop asking who ought to man “the tiller of the economy.” Instead, we should re-evaluate whether it ought to have such a steering mechanism at all.

 —Will Belcher is a senior studying political science

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