Behind the mysteries of the Federal Reserve

The kind of attention Federal Reserve gets worldwide one would imagine that this is one institution which must be having broad approval from US people and polity. Ironically, it is actually just the opposite.

Unlike most parts of the world where discussion on central banks is just about their rate moves, in US one finds equal number of discussions on origins and relevance of Fed. This has gained steam after the crisis and lots of stuff is being written looking at historical basis of Fed.

One such recent book is by Prof Peter Conti-Brown, a professor of legal studies and business ethics at Wharton. Here is his interview where he makes several food for thought points:

Knowledge@Wharton: The Federal Reserve (Fed) has been right there in the front of a lot of what you see in the news these days: anything revolving around the U.S. economy, and in some respects, the global economy as well…. Talk a little bit about [the concept behind the book].

Peter Conti-Brown: Any time you talk about the Federal Reserve, especially in the public — especially after the crisis, frankly — there’s this sense of mystery, a sense of conspiracy. If you look in the Library of Congress catalog of books on the Federal Reserve, there are shelves that have just grown under the weight of the conspiracy theories behind them. Some of these are pretty harmless — for example, the Council on Foreign Relations and the Federal Reserve run the global political system through Bohemian Grove, or something like that. [Some] are kind of silly. Some of them are actually quite evil. It won’t surprise you, a lot of anti-Semitism shows up in these books.

Part of what was motivating me over the last six years that I’ve been working on this book was getting at what makes the Fed such a uniquely mysterious institution, that draws these conspiracists out. On one part it might be, “Oh, because what the Fed does is so technical.” Many of us stopped taking math in high school. Those of us who continued math through college still didn’t get the education needed in order to do monetary policy in the heavily mathematical way that it’s done.

But that actually doesn’t make much sense as an explanation either. Because if you’ve ever read an application to the Food and Drug Administration for a new medication, you’ll see it is not written in English. This is only for experts. The same is true for the EPA [U.S. Environmental Protection Agency], or the FCC [Federal Communications Commission], or any other agency of government. This is technical work. So that doesn’t distinguish the Fed. That’s the same with all of them.

What does distinguish the Fed, and here’s part of the title of the book, is this extraordinary concept of independence. So we have the story about national government coming to us from the Constitutional Convention, and the pen of James Madison, that government is this tripartite structure. We’ve got legislative, executive and judicial. Well, where does banking come in?

Formally, legally, the Federal Reserve is a creature of Congress. It’s created by statute. But its functions are quite different from functions of making law or enforcing law or judging between competing views of law. It is a financial, a banking function. The Fed is structured by time and practice and law, to be apart from these other three branches. It’s not a co-equal branch of government. As I said, it’s subject to Congressional and other kinds of political oversight. But there’s this idea that the Fed is independent.

When I started working on this book about six years ago, it started as an article. I started puzzling through, “Well, what do we mean by this concept of independence?” In some sense, independence sounds great. That’s like motherhood or fatherhood or apple pie.

Read the whole thing.

One wishes we had such discussions in India too which move beyond eulogizing policy action by Indian central bank..


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