As we've observed, it was Fed interest rate policy under Alan Greenspan that fueled the housng bubble and the grand increases in leverage and indebtedness across the society -- household, business, government. It was Fed oversight and regulation missing from the field that allowed -- enabled -- the misallocation of capital, mismanagement of risk, and explosion of hidden obligations. It is the inadequacy of the Fed's economic understanding that has kept the current calamity growing long after it could have been dealt with rationally.
The Fed is independent as no other agency of federal government is independent. it reports to Congress. Its chairman and other board members are appointed by the President. It is owned by its member private banks. And since the notorious Treasury Accord of 1951 it has exercised ever more complete control over one-half of economic policy -- monetary policy. The Fed takes direction from nobody. Up until its attention was diverted by an economic collapse of historic proportions, the Fed was obsessed primarily with inflation.
The philosophy under which it operates is shared across the banking community. Today it is a hybrid of Monetarist pap and the aforementioned anti-inflationary bias. This is combined with an ever more aggressively violated trust in the bankers themselves. It is nothing other than the picture of a regulatory agency which has become captive to the industry it was supposed to regulate.
Ben Bernanke himself has made his academic place with the proposition that the Great Depression could have been prevented with radically more expansive monetary policy and a commitment to save the banks. The first -- the monetary policy -- is indeed the primary premise of the Monetarist school led by Milton Friedman. The second, the primacy of the banking institutions, is an unproven hypothesis Mr. Bernanke is testing with trillions of real money.
The size of these megabank zombies is testament to the deregulation which dismantled New Deal protections. Bernanke has turned the Fed's own balance sheet into a replica of those of the zombies in an effort to save them -- transfusing the full faith and credit into basically corrupt institutions.
It is our speculation here at Demand Side that the inability to institute the receivership operation on these zombie banks that is routinely undertaken by the FDIC -- nationalization -- is largely because of opposition by the Fed and Bernanke's interest in keeping them alive. Likely there is sympathy for this position by amigo Larry Summers in the White House and Timothy Geithner at Treasury. But hte central obstacle is the Fed. The Fed is beholden to nobody. And without the Fed no coordinated triage can take place.
No doubt Bernanke will be a one-term chairman, but right now he holds the levers of banking regulation. The good start on fiscal policy made by the Obama administration will be frustrated if there is not some real improvement on this front.One does not need to accept the Demand Side remedies to admit that the Fed has not provided any relief in the arena of its responsibility. It is our contention that it is the Dark Ages economic philosophy, the institutional decay and the intellectual biases of its chairman that coalesce into the single biggest obstacle to recovery.