The Fed Says It Stabilizes the Economy. I’m Skeptical.
Before, during, and after the 2007–09 financial crisis, the masthead of the Federal Reserve Board’s main webpage included the following assertion right below its name at the top of the page:
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.
This statement is still there today. Can we all breathe easier now? Maybe not, if we endured one of the worst financial crises ever while the Fed was championing itself as a source of stability.
Rebranding to Inspire Confidence
Curiously, the board changed the wording of the statement at the top of the main page of its website during 2007, amid the onset of the 2007–09 disaster. Back in January 2007, the internet archive Wayback Machine shows the following saying to the right of the board’s name at the top:
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.
In other words, at the beginning of the year, the assertion was an opinion of what Congress intended, not what the Federal Reserve said that it provided in reality. By the end of 2007, however, the statement had taken on the more assertive, confidence-inspiring tone it has today. The Fed has advertised itself as a sufficient condition for financial stability, period—not simply as a means by which Congress tried to promote that difficult goal.
This helps to explain why the Fed’s forecasting failed so dismally before 2008–09. When advertising itself as a source of stability, it may have been hard to predict what ended up being one of the worst financial crises in our nation’s history.
We should try to learn lessons from history, including this one. Can we take for granted the Fed’s continuing claims to be a guarantor of stability, today? Not just in terms of the Fed’s role in stabilizing and/or bailing out large financial institutions, but for a stable price level?
In this light, the Fed’s more recent claims that inflation threats are “transitory,” and that it has the tools to manage higher inflation if it arises may not be so comforting. And the factors undermining confidence in the Fed’s credibility for inflation fighting are related to its claims to serve as a source of financial system stability.
The Financial Stability Report: Avoiding Liability for Crises
Back in 2010, reeling from the political effects of the 2007–09 financial crisis, Congress passed the 849-page “Dodd-Frank” legislation. It was signed by President Barack Obama with a statement that the law was intended “to make sure that a crisis like this never happens aga
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