The Fed's Political Problem

How Politics Threatens U.S. Monetary Policy

Courtesy Reuters

In the midst of the ongoing financial crisis, Congress is now considering a bill that would subject the Federal Reserve to congressional audits. It would be a shame to let that happen. Some functions of government properly belong in the realm of technocracy (for example, drug approvals), and others belong in the realm of politics (for example, same-sex marriage). I first argued in the November/December 1997 issue of Foreign Affairs that the U.S. government was placing too many decisions in the political realm and too few in the technocratic one. In the 12 years since, I have become increasingly convinced of this.

The thought back then was inspired by the apparent success of the Federal Reserve System. A noteworthy creation of the Progressive Era, the Fed was designed to conduct monetary policy on decidedly nonpolitical grounds: it has only a vague legal mandate from Congress -- to pursue both "stable prices" and "maximum employment" -- and nearly complete discretion to fulfill its mission as it sees fit. Over the years, the Fed, protected from partisan political concerns, has been able to run a very capable -- which is not to say perfect -- monetary policy, almost certainly keeping inflation lower than politicians would have. Yet, despite this success, few, if any, U.S. government agencies today enjoy anything remotely close to the Fed's degree of insulation from politics. Maybe, I suggested in 1997, more should.

Since then, the Fed has scored some spectacular successes. It averted financial calamity in the United States as economies faltered throughout Asia in 1997-98; it steered the country through the post-2000 stock market crash with minimal damage; and, most recently, it took extraordinary measures to avert what its chair, Ben Bernanke, said might have become the Great Depression 2.0. But it has also suffered some spectacular failures. For example, it did not properly supervise banks in the run-up to the current crisis, nor did it protect consumers from predatory mortgage lenders.

Ironically, both the Federal Reserve's failure to

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