Jackson Hole, Wyo. — Since the Great Recession ended in 2009, the recovery has been slow and painful. Wages have been so stagnant that the average American family earns $1,000 a year less in income than it did in 2008. That’s why some two-thirds of people believe that their children won’t be better off than they were — a reversal of the American Dream.
A growing number of people believe the Federal Reserve has hurt rather than helped the recovery. It has pursued zero-interest-rate policies that have perversely made it impossible for many businesses to get credit to expand. The Fed and other central banks have injected trillions of dollars into the global economy; according to the New York Sun, the result is that “the world is now afflicted by a public-sector debt bubble that could rupture in any of a number of countries.”
The Fed’s blatant attempt to prop up asset prices has fueled inequality. The Fed’s low-interest-rate policies have “exacerbated the wealth gap between the poor and the rich, because the rich have assets,” former NYC mayor Michael Bloomberg recently said. “And that is what is being hiked here because of low interest rates, whether they own stocks or whatever the case may be.”
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In the Bank for International Settlements’ most recent annual report, Claudio Borio analyzed the negative impact of low interest rates, concluding: “Rather than just reflecting the current weakness, low interest rates may in part have contributed to it by fueling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth, and too low interest rates. In short, low rates beget lower rates.”
The Fed has become a more omnipresent force in the economy than it used to be. The Dodd-Frank law gave it enhanced powers, the Fed routinely issues its own sweeping financial regulations, and the Fed alone has the power to determine how much money should be in the economy. Lawrence White, a professor of economics at George Mason University, says the Fed is now akin to a de facto “fourth branch of government,” but one whose powers are not defined by the Constitution, and one in which none of the officials are elected by the people.
“No one ever conceived of monetary policy having that kind of power,” David Jones, a former Fed economist, writes in his book Understanding Central Banking: The New Era of Activism. “We really have a much more powerful institution . . . than we ever had before.”
So it’s no surprise that this year’s annual gathering of the world’s central bankers in Jackson Hole, Wyo., (sponsored by the Kansas City Fed) should attract close attention and spur the holding of not one, but two, nearby counter-conferences criticizing Fed policies.
At its conference, the Fed Up Coalition — a group of unions, community organizers, and left-wing activists — challenged the Fed to keep its zero-interest-rate policies. “The economy has not fully recovered, and interest rates should not be raised when racial disparities exists,” claimed Shawn Sebastian, a policy advocate for the group who points out that minorities have high unemployment rates.
The other counter-conference was initiated by the American Principles Project and featured critics — largely conservative — who say that the Fed has failed to defend the dollar, failed to prevent panics, and is trying to steer an economy it can’t begin to understand. “The thing is, they don’t have a clue,” says financial analyst Peter Schiff, who correctly predicted the 2008 recession. “They have consistently overestimated GDP growth ever since they began making their predictions public. They have been wrong because they don’t understand how their stimulus is poisoning the economy and preventing real growth. They are a bunch of kids experimenting with the biggest chemistry set ever created. Sooner or later, they are going to blow us all up.”
Benn Steil, the director of international economics at the Council of Foreign Relations, told me it was “embarrassing” to see so many people hang on every word uttered by central bankers at their Jackson Hole conference. “I’ve heard officials there say they may have to raise interest rates just because they said they would, and they’d lose credibility if they didn’t,” he says. “Their policies look like a seat-of-the-pants approach, and they don’t seem to understand why they aren’t working.”
Representative Scott Garrett, a New Jersey Republican who chairs a House subcommittee on capital markets, was at the conference to report that Congress may be inching toward a move to tighten the Fed’s leash. A bill sponsored by Michigan Republican Bill Huizenga is moving to the House floor, Garrett says. It would create a monetary commission to review the Fed’s performance as it enters its second century. Other measures under consideration are an audit of the Fed and a reassessment of the Fed’s 1978 mandate to pursue full employment at the expense of its role as an inflation hawk.
Jeff Bell, a former adviser to Ronald Reagan and now the director of policy at the American Principles Project, told the conference he was excited by a new poll his group commissioned from pollster McLaughlin and Associates. It asked 1,000 likely voters whether they supported a gold standard, while recognizing that many people would be unfamiliar with the concept. But a surprising 39 percent agreed that the country would be better off with one, with only 15 percent disagreeing. The remaining 46 percent did not know. Surprisingly, support for a fixed monetary rule crossed demographic divides. While 45 percent of Republicans backed gold, so too did 37 percent of Democrats. A surprising 39 percent of African Americans favored a gold standard, the same number as the general population. Hispanics, at 45 percent, and Asians, at 61 percent, were significantly more in favor of the concept. By age, 38 percent of those younger than 30 wanted a gold standard, while only 34 percent of those over 65 agreed.
Regardless of just how the Fed’s control over the money supply should be reformed, Americans clearly have an appetite for a debate. Governor Chris Christie and Senators Rand Paul and Ted Cruz have criticized the Fed’s zero-interest-rate policy, and the American Principles Project hopes to generate enough interest in the subject to force other candidates to address the issue in Iowa and New Hampshire.
It would be a shame if the issue of monetary policy — which used to figure prominently in presidential elections a century ago — were absent from the 2016 elections. Just last year, former Fed chairman Paul Volcker, who conquered the runaway inflation of the early 1980s, gave a speech at a conference in which he admonished central bankers to wake up and reevaluate their performance. He called for a new Bretton Woods, the 1944 conference of nations that set up an international gold-exchange regime (which Richard Nixon abandoned in 1971). “By now, I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success,” Volcker said. “In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.”
Reforming the Fed should be high on the priorities list of everyone who is serious about improving the long-term health of the U.S. economy. And that goes as well for those who claim to speak for the most vulnerable in our society, who have often been the biggest losers from the wage stagnation of the past two decades.
— John Fund is national-affairs correspondent for National Review Online.