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October 12, 2013

The Critical Story about the Federal Reserve Bank that the Media Refuses to Tell

It’s been common for a long time now, but it is still shocking at how many media outlets and journalists, including the very best, still never make the connection between the Fed/Fed policy and the financial crash of 2008-2009.  Robin Harding, a Financial Times’ columnist, is only the latest to do this in his memo to Janet Yellen, the economist President Obama has nominated to be the next Chair of the Fed.

There is only one reason the Fed has a zero interest rate policy (ZIRP) and embarked on an unprecedented program of purchasing mortgage assets/treasuries, which has ballooned the Fed balance sheet to almost $4 trillion: the economic wreckage done by the financial crisis of 2008-2009.  But no matter how much the ZIRP, QE 1, 2, 3, infinity, or tapering are discussed by the brightest people, no one ever mentions that fact.  Reading Harding or all the other reporters/journalists/commentators, you’d think ZIRP and the $4 trillion balance sheet were the produce of Immaculate Conception:  they arrived without any preceding event.

This is, of course, preposterous.  It’s like talking about rebuilding New Orleans and all the new levees without ever mentioning Hurricane Katrina.  The discussion would be so incomplete as to be unintelligible.  And, yet, that is every discussion about the Fed, which focuses on today’s circumstances and how the Fed/next Fed Chair will unwind the policies. 

As a result, Harding’s otherwise intelligent column today lacks crucial context, which leads to another common omission in the reporting on the Fed.  It no longer has a dual mandate; the Fed now has a three part mandate: price stability, employment and financial stability, as elaborately set forth in the Dodd Frank financial reform and Wall Street re-regulation law. 

Never mentioning that the Fed’s multiple unprecedented policies are direct responses to the worst financial crash since 1929 and the worst economy since the 1930s and its new three-part mandate leads to a number of other errors.  For example, thinking about future policy as a continuation of today’s policies would seem, at best, questionable.  Another example is the failure to understand how important it is for the Fed to carry out its financial stability duties (which is not only to counter “asset bubbles,” as Harding suggests).  After all, if the Fed does that job right (along with other regulators) and prevents (or minimizes) another financial crash, then the other two jobs are a whole lot easier and very different. 

With the costs of the last crisis projected to cost the US more than $12.8 trillion, reporting on the Fed should include why its policies exist today and use those facts to inform thinking about what it should do today and tomorrow, including making sure it never has to take unprecedented actions to prevent a Second Great Depression again.



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