There seems to be a broad acknowledgement that the Federal Reserve has made the terrible decision to randomly change their goals by making their new top priority maintaining a one-percent inflation target, instead of the old understanding, two-percent inflation, or trying to achieve full employment, despite 8.8 percent official unemployment. I will let Paul Krugman and Brad DeLong explain how horrible this decision is for regular Americans—they do it better than I can.
However, as a person who believes the inherent structure of things is more important than individuals, stated goals, mandates or almost anything else, this is slow motion disaster was entirely predictable. I couldn’t predict that the Fed would take this particular moment to embrace this exact destructive madness, but given its structure, it was inevitable that the Fed would make terrible decisions at the expense of regular people.
The structure of the Federal Reserve inherently caused this problem
The Federal Reserve is, by design, very “independent” (well, from our elected government, anyway, not from the banks that populate the board the runs it), secretive, and highly unaccountable (to our elected government, at least).
The Fed is technically private and not part of the government, this means the Fed can’t be audited. The seven members of the Federal Open Market Committee that come from the government are appointed by the president to serve for extremely long 14-year terms. In addition, over 40 percent of the FOMC, five members, have basically zero accountability to government or the people. They come from the regional banks controlled by the financial corporations. So, the only constituents the FOMC really is accountable to are the large financial companies. This is made ever worse by the fact that former Fed appointees can almost always expect a multi-million-dollar Wall Street job once they leave.
Arguments supporting design of the Fed mirror arguments in favor of dictatorship
Many people, for a long time, have argued this “independence” is a good thing because it frees the Fed to make the unpopular “tough choices.” Of course, that is the exact same argument made by those who supported an all-powerful monarchy that could make tough choices without fear of being unpopular in the next election. The efficiency of a wise, all-knowing, and benevolent king would be a good way to run things, but history shows such a family never has and never will exist. Eventually no accountability breeds idiotic recklessness, and accountability only to a small group leads to massive corruption.
Yes, in theory, being independent does technically mean the structure of the Fed could make the unpopular but right decisions that are best for regular people, but that is to whom it is almost totally unaccountable. On the other hand, independence means it is equally free to make the very unpopular decisions that are bad for regular people but great for rich bankers, to whom the Fed has much more fealty.
For a structuralist, the fact that the Fed uses its “independence” for decisions along the lines of the latter is totally predictable. That is exactly what happened in the bailout when not only did the Fed make the banks rich with free money at government expense, but also basically just gave free money to the wives of banksters.
When the problem is structural, you need root and branch reform
The point is, don’t look at the current people leading the Fed as misaligned, uninformed, or evil. That leads to thinking the fix for this problem is just a really good argument or the replacement of FOMC members with a new set of super-smart, benevolent overlords.
It is the structure of the Fed that is inherently rotten, and favors the banks over the people. Independence and lack of accountability doesn’t lead to smart, “tough choices,” it just provides the secrecy and freedom that feeds corruption. Fed critics need to realize the only real solution is total root-and-branch redesign that gives it a structure that encourages the best decisions for regular people.
Given its current structure, there is no question of whether the Fed will act in the best interests of the rich banksters or regular people. The only question is when and how.