December 12, 2011 10:17AM

Fed Apologists Gone Wild

In today’s Washington Post, Robert Samuelson laments in “Fed bashing gone wild” that public concerns about the Federal Reserve’s behavior during the financial crisis undermine the Fed’s ability to save our economy. In Samuelson’s words: “If the Fed is stigmatized for succeeding, we may find that next time it won’t be there.” I’m struggling to figure out what “success” Samuelson is talking about.

He begins his piece relating how the Fed was created in reaction to the Panic of 1907 but that inaction on its part made the Great Depression worse. His concern: “Criticism that the Fed was too active in 2008 may induce it to be too passive in another crisis.” He conveniently leaves out the NY Fed’s role in helping create the 1920’s stock market bubble, which was a direct result of its efforts to manage the dollar‐​sterling exchange rate. But that omission shouldn’t be surprising as Samuelson also fails to mention the Fed’s role in inflating the recent housing bubble (how is three years of a negative real federal funds rate ever good policy?).

Implying that the massive number of bank failures in the Great Depression would have been avoided with a more active Fed also ignores, or “revises”, history. What about Canada, it also had a depression, but lacked any central bank and did not witness any bank failures? There’s a large academic literature on banking stability during the Great Depression, those interested in facts couldn’t do much better than starting here.

Of course Samuelson also repeats the same myth that we’d be in another Depression had not the Fed rescued, under very generous terms, the financial system. All due respect to Mark Zandi’s opinion, but serious research has found that “from the start of the financial crisis (third quarter of 2007) to its peak (first quarter of 2009), both large and investment‐​grade non‐​financial firms show no evidence of suffering from an exceptional systemic credit contraction.” The “freeze” in the commercial paper was only in the bank‐​backed ABS market, not the industrial side. This was never about helping Harley‐​Davidson make pay‐​roll, it was always about bailing out Citibank and the like.

The Federal Reserve has a long record of failure. I don’t see it as an exaggeration to say its been the cause of crisis far more often than the cure. If we simply look the other way, as Samuelson would have us do, then we are certain to have many more loose‐​money driven booms and busts, resulting in additional financial crises.