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 asks for just a little more time or a little more understanding.
I don’t pretend to be impartial when it comes to the Federal Reserve – I have my list of personal gripes both with Fed policies, as with the vocal alarmists and apologists who fail to look holistically at the role of America’s central bank in the 21st century global economy. But as a trained journalist, I must admit that what disappoints me most is the lack of an honest debate about our nation’s fiscal policies and its caretakers.
So here is my humble attempt at clearing the air and starting an important conversation about our central bankers: a hard look at common myths and ugly truths about the Federal Reserve.
The only disclaimer I will add is that I’ve done my best to broadly cover the major points of contention with the intention of starting a conversation about the important issue of the Federal Reserve. It is by no means complete, but is hopefully a good place to start. Your questions and corrections will be the real value of this piece – so make sure you to comment, criticize or add to any of the points here as you see fit.
Here goes: 5 myths and 5 ugly truths about the Federal Reserve.
Myth #1: The Fed is evil!
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 previous bubbles where 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.
But here’s an ugly truth about Fed mistakes…
Unfortunately, the Federal Reserve is a very powerful entity with very real clout. The reality is that good intentions do not minimize the impact of bad moves and incompetence at the Federal Reserve – no matter how impressive the resume, noble the motivation or well-intentioned the philosophy. 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.” In short, even if you are 100% willing to embrace the role and responsibility of the Federal Reserve, the reality is that the human beings who operate the institution are far from perfect and they cannot be left off the hook as if they forgot the dry-cleaning. When the Fed makes mistakes, we all suffer the very real and very serious consequences.