The Fed is of the banks, by the banks and for the banks.

Brad Delong recently remarked that it is “good to know” that the Fed doesn’t have a double mandate (1. fight inflation, 2. fight unemployment), but rather a triple mandate (3. keep the financial system strong and stable).  The idea the the Fed has only a dual mandate is a common misconception that is perpetuated in the standard economics textbooks.  As I posted earlier, if you bother to look at the Fed’s charter and mission statement, it is clear that the ‘new’ mandate that Delong just noticed has always really been the Fed’s primary job.  The Fed was created during the gold standard when there was little it could do with monetary policy to stabilize inflation and unemployment, so its original charter was almost purely to help the banks.  The so-called “dual mandate” is really just an afterthought that was added later when monetary policy responsibilities were added to the Fed’s main responsibilities helping the banks.   The banks help choose the people who run the Fed, and some of these people come through the rotating door from bank employment to the Fed and go back to the banks after working at the Fed.  So the Fed’s ecological niche in the political landscape is firmly ensconced on a high peak of finance that is remote from ordinary Americans.  The political economy of the Fed is sadly neglected in comparison with the scrutiny pundits and intellectuals give to the politics that drive fiscal policy because the Fed has the most control over the economy of any institution.  If median income is declining (as it has been), then the Fed should bear some of the responsibility as the main driver of economic policy.  The fact that the Fed doesn’t care about the median American is shocking and should be bringing out street protests, but instead the Fed mostly gets a pass for printing money and giving it to the banks rather than directly trying to help the average American.  The banks have been earning record profits for several years under this policy and most of banking profit ultimately goes to elite households.  This Fed policy helps explain why the top 1% richest Americans have gotten virtually all the increased income since the recession officially ended.

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Posted in Macro

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