Is the Fed out to get us?
The central bank and the people who run it may not not perfect, but that doesn't mean they're evil.
Misinformation about the Federal Reserve abounds these days. And that misinformation cuts both ways. For every conspiracy theorist who labels the central bank and its chairman Ben Bernanke as the root of all economic evils, there is a brainwashed Fed defender who just doesn't get it.
I don't pretend to be impartial when it comes to the Federal Reserve. I have my list of personal gripes with its policies. But there's one question at the core of most Federal Reserve criticism that spawns nearly all others: Is the Fed evil?
It's important to note that whether or not the Fed makes mistakes isn't the core issue here. The central bank has the potential to harm the economy with its policies, and sometimes it does. That is an indictment not of the institution itself but of the human beings at the helm.
To paraphrase the NRA: "The Fed doesn't hurt the economy. People at the Federal Reserve make decisions that hurt the economy."
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The mistakes of the Fed are easy to point out. Many well-respected economists lay much of the blame for the Great Depression at the feet of the Fed. Put simply by Nobel Prize-winning economist Milton Friedman: "We had repeated recessions over hundreds of years, but what converted (the 1929 recession) into a major depression was bad monetary policy."
Unlike in previous bubbles for which the Fed gets only partial blame or can reasonably defend its actions, it is accepted by many that the Fed royally screwed up almost a century ago. All that said, however, it is the height of hyperbole to claim the policy mistakes or inaction of the Fed is evil. In fact, most monetary experts say it was inaction of the Fed that caused the Depression, not active malice.
Incompetent officials who fail to properly perform their roles managing the money supply may be rightly despised for their lack of foresight or outright stupidity, but their gaffes are not a sign of ill will.
The reason so many people are fired up about the Federal Reserve is that it is a very powerful entity with very real clout. True, good intentions do not minimize the impact of bad moves and incompetence at the Federal Reserve. But it's telling that Friedman also said of the Fed's actions in the Great Depression: "There's no other example I can think of, of a government measure which produced so clearly the opposite of the results that were intended."
So as for the question of whether the Fed can harm the economy, the answer is yes, and sometimes it does. But as for whether those mistakes and miscalculations are evil, it is unfair to make a concrete link between bad results and bad intentions.
That said, all the Fed's good intentions were cold comfort for the legions of Americans unemployed in the 1930s, and it will hardly be a defense if Federal Reserve policies are found to be more harm than help in the current economic downturn.
For more on the fed, read my article 5 myths and 5 ugly truths about the Federal Reserve.
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