Flaying the Fed

...Greider does not have much sympathy for the Fed...

...As long as inflation remained low, no one paid much attention to monetary policy...

...banking system...

...Such a crisis did not occur, but one day it could since the Fed is an independent agency removed from direct electoral checks...

...The Fed not only forced the weak to the wall, Greider notes, it also bailed out the powerful when they got into trouble —or at least eased their pain...

...By the time Paul A. Volcker was named Fed Chairman in 1979, an economic hurricane was blowing and the central bank's role as a stabilizing force that "leaned against the wind" had attained unprecedented importance...

...Since Volcker was a dominating chairman in the eight years he served in that position, Greider has even less sympathy for him, seeing not a Horatio at the government printing presses but a manipulative, power-hungry bureaucrat quick to take credit for any successes while blaming others, usually Congress and the White House, for the failures...

...Yet if Greider's title is a whopping overstatement—the Fed no more "runs the country" than does the Supreme Court, the CIA or the House Rules Committee—he is undoubtedly correct that the "money question" is too crucial to be left to the bankers...

...What would have happened if Volcker had insisted on pulling in one direction when the public wished to go in another direction...

...The Administration's tax and budget programs were skewed toward the rich, and the Fed, in these years, aggravated the inequities...

...Writers & Writing FLAYING THE FED BY BARRY GEWEN The greatest virtue of William Greider's lengthy and rather lumpy book, Secrets of the Temple: How the Federal Reserve Runs the Country (Simon and Schuster, 798 pp., $24.95), is the light it shines on America's central bank...

...Deeply in debt for reasons beyond their control, they demanded openly expansionist policies that heretically challenged the mystique of the stable dollar and Wall Street's laissez-faire religion...

...Any Economics 101 undergraduate could have predicted the outcome...

...Greider does not argue that Volcker's decisions were necessarily wrong...

...As interest, the price of money, rose in response to the Fed-induced short supplies, wealthy creditors prospered...

...Rewards are distributed seemingly at random, with no regard to merit or fairness...

...In fact, uncertainty is the prevailing emotion in periods of inflation, a corrosive, disequilibrating phenomenon that upsets all expectations and feeds irrationality...

...Debtors, on the other hand, went bust...

...It is something of a mystery to him that inflation has found no champions among the noninvesting classes...

...He merely observes that America's vaunted free enterprise system functions in one way for the big, particularly for the giants of the financial sector, in another way for the small...

...economy bears little resemblance to the idealized 19th-century picture presented in college textbooks and the editorial pages of the Wail Street Journal...

...And when Volcker spoke of "his constituency," he was not referring to small farmers and blue-collar workers...

...A day after Continental Illinois was rescued, he points out, small banks in Louisiana and Tennessee were allowed to go under...

...and, after ceding control of the currency to an independent technocratic agency whose seven-member Board was appointed to 14year terms by the President, America's elected officials settled in for a long rest from monetary concerns...

...In the past, the bank has normally accommodated political opinion to a degree because, unlike the Supreme Court, it was created by law, not Constitutional mandate, and what Congress gives, Congress can take away...

...This sweet tranquillity was shattered by a rush of tumultuous events beginning toward the end of the '60s— the heating up of the economy as a result of the Vietnam War, the float of the dollar marking the collapse of the postwar international monetary system, opec's oil shocks of 1973 and 1979, the onset of double-digit inflation under Jimmy Carter, and finally the Reagan fiscal policies that produced the staggering Federal deficits of the 1980s...

...Wage earners are forced into a race against increasing costs, and unless they are well-positioned in the economy or members of strong unions, there is a good chance that they will lose—as the millions of minimum-wage workers have...

...Through the Volcker era, the bank generally followed a tight-money policy, pulling in the reins on the currency to combat inflation and compensate for the Reagan deficits...

...The same objection applies to Congressman Jack Kemp's proposal to add the Secretary of the Treasury to the Board of Governors...

...Although the Populists were too radical for their time and were beaten back by the Eastern Establishment, their proposals for a flexible currency and Federal regulation of the banking industry were adopted in a different form two decades later...

...The Federal Reserve, with its powers to expand and contract the currency, is an enormously influential institution whose operations and decisions are commonly ignored by the public and the press...

...debates about the discount rate are not exactly the stuff to get the partisan juices flowing...

...During the 1950s and early 1960s, William McChesney Martin, the Federal Reserve Chairman, was a household name only in homes where the family income rose and fell with the price of bonds and the chauffeur polished the Rolls...

...The money question receded from political debate and became submerged in a new managerial complexity...

...Nonetheless, as Greider demonstrates, there is a striking imbalance in the Fed's composition: "With only scattered exceptions, the Fed governors were drawn from two disciplines —financial economics and banking...

...Greider persuasively argues that the Fed is too narrow and insular in its present state...

...During the Populist era at the end of the 19th century, masses of supposedly unsophisticated farmers were aroused to political fury by financial matters today considered too arcane for the average voter...

...In any case, it seems evident that the country should look back to the act that originally established the Federal Reserve System, which called for all interests to be represented...

...Broadly speaking, his indictment of Volcker revolves around the question of inflation...

...Greider believes that a shrinking dollar helps the majority at the expense of a wealthy minority, and that therefore the policies of the Fed in the '80s were essentially misguided...

...Instead, reformers should focus on the other end of Pennsylvania Avenue and perhaps consider putting the heads of several Congressional committees (Banking, Labor, etc...

...Changes appear to be in order...

...One need only compare the storm of controversy that burst over the naming of a new Supreme Court justice with the resounding thud of indifference that surrounds Ronald Reagan's impending nomination of a candidate for the Fed's Board of Governors...

...Volcker and the bank, claims Greider, singlemindedly chose capital over democracy or, as he says at one point, "money" over "life...

...Greider reminds us that not so long ago national elections turned on currency issues...

...Retirees' Social Security checks may be protected through indexing, yet it is surely dispiriting for them to see whatever other savings they have shrivel away...

...In 1980, a hefty portion of the Hunt Brothers' considerable empire nearly came crashing to the ground after their attempt to comer the silver market failed...

...on the Board...

...When the nation's elected representatives proved unwilling to confront the problem, the job was left to Volcker and the Fed's clumsy, inequitable monetary mechanisms...

...As the head of the House Banking Committee sourly said of this operation, it "dwarfs the combined guarantees and outlays of the Federal government in the Lockheed, Chrysler and New York City bailouts...

...In 1913, the Federal Reserve system was set up, not to assist agrarian debtors but to prevent financial panics...

...The Board of Governors has nothing to gain from confrontations...

...Planning becomes impossible...

...Not since 1913 has the need to democratize money been so clear...

...But the reason, no doubt, is that the benefits are not so clearcut as he supposes...

...The Fed's responsibilities are highly technical...

...Most dramatically, the Fed made emergency loans of $8 billion to save the freewheeling Continental Illinois, the nation's seventh largest bank...

...Volcker approved a loan of $1.1 billion from a group of 13 banks to prevent a fall that would have taken down many more besides one overrich and overreaching family...

...While the double digits of the late '70s did not approach Weimarian levels, there was a widespread feeling among rich and poor alike that things were slipping out of control...

...Even home owners are faced with uncertainty, for if they ever wish or need to sell their houses, they could well have to pay still more than they receive for new residences...

...A moralist, Greider is better at spotting hypocrisy and inconsistency than in formulating policy...

...Some have already advocated placing the bank under the President, yet increasing the Executive's powers by giving it control of the money supply is a cure worse than the disease...

...Similarly, Volcker helped arrange for a shift of billions of dollars to a number of indebted Latin American countries to protect the positions of several major American banks, and possibly the entire U.S...

...The poor and the elderly, he says, are largely shielded from inflation, and middle-class home owners, whose mortgage obligations diminish as income and prices rise, are the biggest gainers...

...If, as Secrets of the Temple urges, discourse should be expanded once again, the reason is that in recent years the Fed has assumed a more obvious and critical role in our lives...

...This is scarcely surprising...

...Worst, inflation has an insidious tendency toward acceleration as everyone struggles to make up lost ground or get a step ahead...

...He considers it an elitist, secretive body more comfortable with bondholders than with wage-earners, an "anomaly at the very core of representative democracy...

...Such comparisons are as educational as they are irritating, though hardly news to readers of economists like John Kenneth Galbraith and Robert Lekachman, who have long maintained that the real U.S...