28 Nov The Secret Term in the Fed’s Triple Mandate: A Critical History
Monday, November 28th, 2011
Over the past several years of this Great Recession, the audacity of the Federal Reserve has been something to behold. In the face of recession and a financial sector in shock, the Fed has taken interest rates essentially to zero, added so much to bank assets that excess reserves have equaled pre-crisis levels of the money stock as a whole, and put so much on its own balance sheet that to call the graph of it a hockey stick is not to do it justice.
The official explanation of the Fed’s outsized moves has rested on two points. The first is that exhaustive academic study of the Great Depression reveals that the fatal mistake in the 1930s was the Fed’s not doing enough to push money out the door. This was not to be repeated in the wake of the 2008 crisis. The second is inspired by the research of economists Carmen Reinhart and Kenneth Rogoff, in their bestselling book This Time is Different (2009) which argued that financial, as opposed to generally economic, crises are special in terms of their depth and duration. The inference drawn is that the Fed’s response to financial crisis has to be proportionate in its size and scope.
To actors in the real economy, it has been too much to swallow. Banks have proven unwilling to lend to an impecunious public, no matter how much excess reserves are on the books and available to counterbalance write-downs. Employers have refused to take out loans to expand plants and equipment and thus employment, no matter how incredibly cheap those loans are, and 14 million are no jobless. Most telling, investors have plowed into one asset class above all as the crisis has droned on. Gold—the classic hedge against discretionary monetary policy—has exploded through its old highs and tripled as the Fed has attended to its agenda.
The Great Recession has thus spawned a great disjunction—between what the Federal Reserve (not to mention the fiscal sector) has done to address the contemporary difficulties and what ht epublic at large has made of these efforts. The gap is yawning. The Fed has gone far out of its way to “do something” in the face of crisis, and economic actors have responded by recoiling.
In a democratic society, such a disjunction is unsustainable, not to mention unhealthy. The time has come to minister to the public’s unease with the Fed’s penchant for the outsized maneuver. We must begin to bring into alignment the behavior of the nation’s central bank with the comfort zone of the nation’s citizens.