You Know the Fed Chairman, And That's the Problem

If you were around before 1990, you might never have heard of the chairman of the Federal Reserve Board, much less have watched the spectacle of his selection. American schoolchildren do not learn lists of the names of Fed chairman, who were selected invisibly and generally served in obscurity. Fed chairman in prior times knew their place in the world, and were largely unseen outside the financial community. The Fed managed America's money supply, an important task, but not material for a Hollywood flick.

We live in different times. For much of 2013, national and international news outlets of every flavor have followed the selection of Fed chair with baited breath. We have a new Pope, but, as of yet, no new Fed chairman. The College of Cardinals is not meeting on this latter choice. Yet, to judge the media coverage, the fate of billions of people, and their hundreds of trillions of dollars of assets, must lie in the balance.

Why, in 2013, has the chairman of the Federal Reserve overshadowed the Pope? Let me suggest three reasons.

Massive debt finance has become the norm, rather than the exception, for our federal government. The days of a disciplined federal government marching down the field triumphantly are distant memories. Today, we specialize in studied indifference to uncontrolled spending, to revenue gimmicks, and to the fiscal crises of the day. We pretend that all this is normal. We teach students that our financial policies are the best they could be. Some eminent economists from Ivy League schools such as Harvard and Princeton even suggest that we should be spending more money. But we know better.

The Fed of the 1950s and 1960s did not need to invent new ways to finance the federal government. In those days, the Fed was the third-string quarterback on a winning team. That is to say, it held the clip board on the sideline, keeping track of statistics and cheering the on-the-field successes of the team.

The Fed leaps in where the rest of the government cannot even imagine to tread. Enter the Fed, the previously anonymous third-string quarterback. It has a plan to at least give the appearance of normalcy: a little quantitative easing here, some massive purchases of Treasury paper there. The federal government limps down the field, not heroic, but at least it is moving. The British would call it muddling along. Americans suddenly know the name of otherwise obscure economists with names such as Greenspan and Bernanke, who appear in hearings before Congress much like oracles from a Greek temple. The Fed looks fantastic, not because it has magical powers, but because the Executive and Congress seem completely unwilling to take responsibility for budgetary matters.

Much of America has come to view the chairman of the Fed rather as a charming economic wizard, perhaps one cast from Harry Potter. We may deceive our children, but we cannot deceive ourselves that our economy and the federal government's role in it are in shambles. Why are we not in worse shape? No doubt, many of us are seduced into believing it must be the economic wizard of the Fed.

It would be wrong to infer that the Fed is comfortable in its heroic role. Our constitution, our history, and even our common sense tell us that Congress and the Executive should sort out the federal budget. They are elected and answerable to the public, and the Fed is not.

There is little to stop the Fed and its chairman from working their will. Most government agencies complain that another branch or office of government stops them from doing what they would really like to do. Call it gridlock, call it checks and balances, call it what you like, our federal government is well-designed to block extraordinary gyrations and dramatic changes in policy.

Not so the Fed. With little more than a wink and a nod, the Fed and its chairman can purchase practically all the paper that it wants, currently $85 billion a month in Treasuries and mortgage backed securities. No small feat.

Who within government could block the Fed from making these purchases, or pursuing almost any other action? No one, it turns out. The Fed is an agency that has largely escaped oversight. It operates without check, without balance. It is perhaps an example of Plato's benevolent prince or dictator. It appears to works when the other branches of government fail, but it offends our sense of constitutional democracy.

The Fed's apparent success is as much mirage as reality, doomed to eventually fail. Its loose monetary policy-quantitative easing, purchases of bonds-has resulted in record-low interest rates, so investors are taking risks to get higher yields. Low interest rates discourage savings and encourage people to take high risks, as well as dampening bank lending. This does not lead to a healthy economy. Four years after the end of the recession, no one calls America's economy healthy. Recovering, yes, but healthy no.

For much of its first two hundred years, the United States paid most of its bills the old-fashioned way: it raised revenues to cover them. In the 21st century, neither the Executive nor Congress seems to assert responsibility for the federal budget. We bounce from one continuing resolution to another, hoping that someone else will solve our budget problems. That someone else turns out to be the Fed.

The new Fed chair will be charged with getting us out of this mess, gradually raising interest rates to avoid inflation, but not so much as to plunge us into a new recession. With annualized GDP growth at about 2 percent, the housing market potentially stuttering as mortgage rates rise, this will be no easy feat.

America is still the most powerful country in the world. We still have the largest economy. Politicians vie to become our president. But much power in America lies with a single, unelected official. Much of the world is looking towards to Washington to learn the name and background of the next chairman of the Fed. When that day comes, even the Pope will notice.