Is the Fed Scared?

This post at Economics of Contempt puts forth an interesting theory that the Fed isn’t taking more action, including trying something unorthodox, because they worry that politicians will harshly criticize them. Of course, as Economics of Contempt notes, if the Fed isn’t acting as they are able to as an independent body because of political fears, then the Fed really isn’t independent.

I’m not entirely comfortable with the version of history in the post which says the Fed was successful “bailing out AIG, establishing currency swap lines, supporting the money market funds.” Sure, they saved Wall Street, but unemployment has dramatically increased from 2008 to now — from 6.2% to 9.5%. If the economy has taken a massive hit in real terms, how well did the Fed succeed? Not well, as it created a depression.

Also, it’s a nice trick if it is the case that the Fed won’t act out of fear of being criticized of politicians. As we see with the deficit hawks, politicians must set policy out of fears of vengeful bond traders, while the Fed must avoid action for fear of what vengeful politicians might say.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s