Friday, March 7, 2008



Mark Gongloff’s and Scott Patterson’s “Ahead of the Tape” column in today’s Wall Street Journal addressed the hot topic du jour, the commodity, specifically the oil and gold, bubble. In the column, Ed Yardeni, one of the sharpest economists to ply the Street, was quoted as saying

“We may be going from bubble to bubble. The Fed was created to avoid financial crises and get us out of them when they happen, and that’s what they’re trying to do.”

Mr. Yardeni is right, wrong, and sort of right. He is right in arguing that we are going from bubble to bubble, from a stock bubble to a real estate bubble to a commodity bubble, all of which were inflated by the Fed’s efforts to avoid recession and to please Wall Street at all costs. He is wrong when he says that the Fed was “created to avoid financial crises and get us out of them when they happen.” The Fed was not created to avoid financial crises, but, rather, to manage the nation’s money supply, primarily with the aim of avoiding inflation, and to regulate banks. However, Mr. Yardeni is sort of right; the Fed has come to see its job as avoiding financial crises and otherwise acting as a sort of uber economic manager. This is not entirely the Fed’s fault. The Humphrey-Hawkins law, passed in 1978, charged the Fed with controlling both inflation and unemployment, and, ever since then, our lily-livered politicians, largely ignorant of the supposedly recondite basics of economics, terrified at the prospect of having to make any decision, that might cost them votes, and constantly on the lookout for a fall guy, have increasingly looked to the Fed to take charge of the entire economy.

So the Fed was not created to avoid financial crises or to act as a Council of Economic Czars, but a combination of its own hubris and the inability and/or unwillingness of our public servants to make economic decisions has thrust this role upon it. This is both regrettable and the source of much of our economic difficulty. When combined with the utter inability of our society to take a recession or for our Wall Street mavens to operate far from the apron strings of their Mother Fed, such a division of economic responsibility contains the seeds of our financial ruin.

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