During his presidency in the 1830s, Andrew Jackson fought a ferocious and successful battle to destroy the Second Bank of the United States, fearing that its powers were a threat to American democracy. We need a revival of this Jacksonian spirit with regards to the Federal Reserve, whose powers in the 21st century far exceed those of Jackson’s bête noir.
Despite a miserable record of managing banks and monetary policy, the Fed has less formal oversight from Congress than do our intelligence agencies. Its control of not only American but global finance is expanding rapidly in unprecedented, dangerous directions.
The U.S. central bank is amassing sweeping powers that are turning other regulators at both the federal and state levels, into secondary players. It is on its way to bringing the entire financial industry, not just banks, under its sway.
Fed officials have openly acknowledged, in the words of Fed Governor Daniel K. Tarullo, that the “aims and scope of prudential regulation have been fundamentally redefined since the financial crisis.” But less widely appreciated is the potential of the Fed’s increasingly meddlesome and capricious controls to ensnare not only banks but insurers, mutual fund companies, hedge funds, equity funds, venture capitalists and anything and anyone else who engages in lending and investing on any meaningful scale.
In a recent speech that sent chills up the spines of many in the financial community, Tarullo suggested what was ahead, offering a critique of the pre-crisis Fed that was truly astonishing. The problem with the old system, he believed, was that it was based on a “microprudential approach” concerned simply with the “soundness of each individual bank.”
Its reach “did not extend to firms and activities outside of banking organizations...regulation must deal with threats to financial stability whether or not those threats emanate from traditional banking organizations. Hence the need to broaden the perimeter of prudential regulation, both to certain non-bank financial institutions and to certain activities by all financial actors.”
Thanks to Dodd-Frank legislation, Tarullo and his colleagues are getting their wish. In addition to mandating the Fed to impose more stringent standards on banks and bank holding companies with assets of at least $50 billion, Dodd Frank also requires these standards be applied to any non-bank financial company singled out by the new Financial Stability Oversight Council. Among those already ensnared by the Fed under the guise that they are “systematically important financial institutions” include Prudential Financial and, perhaps soon, MetLife. The central bank has a number of other financial outfits in its cross-hairs.
All told, the ultimate effect of the Fed’s power grab will be the undermining of our capital markets, whose role in creating our nation’s standard of living and economic success story remains unappreciated by the vast majority of Americans.
Until the Fed-caused financial crisis of 2008-09, the U.S. economy usually expanded at a 50% faster rate than other developed economies. Such growth has been made possible by our diverse and creative capital markets, which make possible the creation and then the nurturing of entrepreneurial ventures whose innovations create jobs and grow into powerhouses like Google, Facebook and other fast-expanding entities.
The lack of American-style capital markets is why Europe has failed to develop an entrepreneurial tradition. Companies there are over-dependent on risk-averse commercial banks that are not in the business of providing capital for entrepreneurial start-ups. Those who do manage to succeed rarely have the opportunity to go public and become globe-girdling giants.
Even before it began “rethinking” its approach, the Fed was moving away from its “microprudential” mission into the politically fraught business of picking winners and losers.
A handful of observers, including, notably, the eminent economist David Malpass, have pointed out that the process of quantitative easing (QE) enable the Federal Reserve to engage in credit allocation favoring government and its corporate cronies.
QE allowed Washington to borrow unprecedented amounts of money in peacetime at virtually no cost, deficits without tears. Bigger companies also had ready access to loans and no trouble floating bonds. But until recently, small and new businesses, prime job creators, were starved for credit. Big government loves an economy dominated by big banks and big corporations – it’s so much easier to control things that way.
If only we could stop here. Alas, as they say on late-night television, “But wait, there’s more.” The Fed’s publicly avowed goal of stoking inflation is also part of this overreach.
Under the Constitution, Congress is supposed to have the power to enact taxes. As John Maynard Keynes aptly pointed out nearly a century ago, however, inflation is precisely that – a stealth tax.
The two percent rise in prices that is the goal of the central bank will cost a typical middle-class American family about $1,000 in additional for fuel, groceries and other expenses.
Yet no one in Congress has asked Janet Yellin, or her predecessors, where our central bank gets the authority to exact this tax, or how raising families’ cost of living by $1,000 a year will stimulate the growth of the economy.
Just as our convoluted tax code needs to be junked and replaced with a simple new one like the flat tax, so, too, the Federal Reserve must undergo a radical overhaul and rediscover its original objectives.
The system was created in 1913 to supply liquidity to banks to meet seasonal cash needs of our still large agricultural sector and to deal quickly and decisively with panics such as that which the country underwent in 1907 – in addition to keeping the dollar fixed to gold.
The Fed’s power grab truly began when, under the influence of Keynes, our monetary bureaucrats decided that “monetary policy” was a thing to be managed and the U.S. ended the dollar’s link to gold in 1971. Consider this: If the nation had maintained its historic growth rates after President Nixon blew up the gold-based Bretton Woods International Monetary System, our economy today would be 50% larger.
For all its failures, the Fed’s highly disturbing and ominous usurpation of authority has been accepted with hardly a peep of protest. Its suppression of interest rates across the board – price controls that have distorted the system – has received scant criticism. And few have recognized the role of the Fed-devalued dollar in the spikes in food and fuel prices of the last decade, as well as in the 1970s.
The Teflon quality of the Fed was most vividly demonstrated by the financial crisis. The hideous housing bubble never would have happened if our central bank, with the connivance of the Treasury Department, hadn’t undermined the value of the dollar starting in the early part of the last decade.
The Fed’s system of unsound money is a fundamental reason for the stagnation, as well as the social divisions we are experiencing today. But this growth-suppressing monster has failed to ignite the kind of indignation that is now swirling around agencies like the EPA, the IRS, the National Labor Relations Board – or the de facto takeover of the health care industry via ObamaCare.
If the economy is ever to recover, and for the current malaise to end, it is imperative that both the press and the public abandon their awe and realize that the Fed’s so-called “wise men” are as human as the Wizard of Oz.
Time to pull the curtain away.
Steve Forbes is Chairman and Editor-in-Chief of Forbes Media. His latest book, "Reviving America: How Repealing Obamacare, Replacing the Tax Code, and Reforming the Fed will Restore Hope and Prosperity" (McGraw-Hill Education, December 10, 2015).