The Fed Ignores Its “Dual Mandate.” Its True Purpose Is Helping Banks.

As I posted earlier, the Fed does not care that the majority of Americans are still in the depths of a recession because the Fed doesn’t even bother to track data about the median American.  But this is just showing that the Fed has the common mutilitarian bias and the Fed is even worse than that.  All the textbooks and the Fed’s own website claims that the Fed has a “dual mandate.”  The alleged mandate is to maintain “maximum employment, [and] stable prices.”  But everyone realizes that the Fed generally ignores unemployment and focuses too much on maintaining low inflation.  If you do a Google search for “Fed dual mandate,” most of the recent blog posts mention that the Fed has missed its own unemployment AND inflation targets for almost five years and yet its policies have mostly continued to reinforce missing both of its own targets.  The revealed preferences of the Fed is that it must really like unemployment that is too high and inflation that is too low because it has rarely taken any steps to reverse them.  There have been three periods of monetary easing since the beginning of the 2008 recession, but the Fed ended them before they had significant impact on unemployment.   Even the Fed’s own internal research shows that it has never cared about helping unemployment.

Officially, last December, for the first time in Fed history, the Fed said that it would actually target unemployment in its most recent round of monetary easing, but it recently prematurely communicated that it is “tapering” its easing despite little improvement in unemployment rates and Krugman notes that this is having the effect on expectations that are eliminating the potential for improving unemployment.

One of the reasons that the Fed ignores half of its “dual mandate” is that it has never really had a dual mandate.  As Wikipedia accurately reports, if you actually look at the Fed’s charter, it says that the Fed’s monetary policy objectives are to, “promote effectively the goals of [1] maximum employment, [2] stable prices and [3] moderate long-term interest rates.”  So right there the Fed actually has a triple mandate, but somehow the third part of the mandate is universally ignored by the press and educators, but it is not ignored by the Fed’s main constituency, the banks and financial institutions who like stable interest rates.

Furthermore, this is only one small part of the Fed’s charter.  If you look at the Fed’s mission, the “dual mandate” (that is really a triple mandate) is only one small part of its four bigger goals.  The other three goals are all about serving the banks and financial institutions.  Serving the banks is the part of the Fed’s mission that dominates its actions.  Forget the “dual mandate.” If the banks are in trouble, it will help the banks first and then think about inflation (because the banks like it low) and only maybe think about unemployment after that IF the Fed can help unemployment at zero cost to the banks.

The dual mandate is really a triple mandate, but the three parts form a hierarchy of needs.

  1. First, the Fed does all of the things that “maintain the stability [and profitability] of the financial system.”
  2. IF the financial system is secure, then the Fed works to maintain low inflation because that is another way of serving the interests of the financial system.
  3. IF all is well with the above missions, then the Fed might do something about unemployment IF it is costless to the financial system.  But in practice, the Fed does nothing about unemployment that are not a simple byproduct of supporting the financial system.  I think that more actions to lower unemployment would probably benefit the financial system too, but the leaders of the financial system have cognitive biases that cause them to ignore unemployment when their profits are good as has been the case for the past four years since the recession officially ended.

Surprisingly little has been written about the political economy of the Fed, because it is the most powerful economic institution in the world and it is extremely undemocratic and relatively secretive.  If you see any good work on the politics of running the Fed, please let me know.  Unfortunately its bias towards prioritizing the banks over the median American are baked into the cake of its institutional structure.  The seven board members of the Fed who are nominated by the president are often people with strong banking-industry ties.  This is a case of regulatory capture of the political process.  If you want to find an expert on the banking system to regulate it, it is hard to find someone who isn’t already a card-carrying member of the banking system.  Who else will have enough knowledge of the system to be able to run it?  Secondly, the banks (and large financial institutions) are directly in charge of appointing other leadership of the Fed.  They appoint all members of both the Federal Advisory Council, and the Community Depository Institutions Advisory Council and they directly elect most of the members of the board for the regional Fed Banks.  This is how the Fed is mostly run by the banks for the banks and that is why the Fed doesn’t care about unemployment.  The Fed’s political appointees (like the Chairman, Ben Bernanke) are supposed to fight unemployment, but they are embedded in a management structure that works for the banks and it is difficult to get the rest of the Fed to care about unemployment unless the banks think that unemployment is a problem for their profits.

And they don’t care.  Banking profits have been good, so they ask why they should rock the boat with monetary policies that will help the unemployed and the median American.  The Fed’s leaders are all people whose earnings and sensibilities are way above the median American and tied more to the banking sector than to main-street America.

The Fed is an essential institution as long as we have a banking system and a banking system is useful for the median person, but the Fed should regulate the monetary/banking system to specifically benefit the median American rather than to benefit the Bank elites.  It is time to end the Fed charter and redraw it with a medianist mission.  To accomplish medianist goals, the management structure must change to reduce the dominance of the banking elites over Fed policy.  At the very least, we need more democratic appointments and fewer banking industry appointments.  There will always be some problem with regulatory capture, but the current system is directly captured by the banking industry and it would be simple to reform the Fed leadership to make it more democratic and aligned with the interests of the median American.   Unfortunately, this simple management change would be fought by powerful moneyed interests who will consider it a radical political change against them and they would happily put the machine gun turrets (mentioned in earlier post) back up in the Fed banks before they submit to more democratic governance.   And almost nobody currently even cares about the real problems with Fed governance, so the revolution is a long way away.   So spread the word.  Reform the Fed.  Make it more medianist.

Tagged with:
Posted in Macro
One comment on “The Fed Ignores Its “Dual Mandate.” Its True Purpose Is Helping Banks.
  1. […] and the rental price of money (interest rates) as well as being the only government agency that is directly responsible for keeping unemployment low. Unfortunately for libertarians, blockchain currencies like bitcoin are EXTREMELY bad at monetary […]

Leave a Comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 96 other subscribers
Blog Archive