The Fed’s New Foray Into Crony Capitalism
By Randall Holcombe • Thursday September 13, 2012 12:21 PM PDT • 18 Comments
I’ve been teaching economics for decades, and until 2008 I taught my students that the Federal Reserve Bank (Fed) engages in monetary policy through open market operations by buying and selling government securities. (They have other policy tools too.) They dealt in government securities partly because their operations would alter the money supply without directly influencing specific firms or sectors of the economy.
This was so firmly accepted as the way the Fed operated that at the end of the 1990s, when the federal budget was in surplus, there was some concern that the national debt would get so low that it would interfere with the Fed’s ability to purchase government bonds through open market operations.
My classroom lectures on this subject changed in 2008, when the Fed provided $85 billion to bail out AIG. Since then it has engaged in continual bailouts of financial firms and purchases of non-government securities. The latest was announced today (September 13, 2012) when the Fed made an open-ended commitment to buy $40 billion in mortgage-backed securities every month as long as the economy was stagnating.
The Fed has moved from engaging in monetary policy in a way that was neutral toward various businesses and industries in the economy to one in which monetary policy is targeted toward specific firms and industries. This current foray, specifically targeted at the housing market, is crony capitalism.
Partly, the cronies who benefit are those in real estate, and in the financial sector. Policies like this illustrate that the “Occupy Wall Street” people have a legitimate gripe. But also, in this case, with the stimulatory monetary policy coming so close to the presidential election, the Fed’s move certainly gives the appearance that Mr. Bernanke is doing a favor for President Obama.
Moves like this generate a risk to the Fed’s independence. When the Fed’s monetary policy was neutral toward various businesses and sectors in the economy, it might make an argument that the Fed will work better if kept free from political control. But when the Fed engages in special interest politics, its argument for independence is substantially weakened. I’m sure Mr. Bernanke realizes this, but is willing to take the risk. He knows that if President Obama is not re-elected, he will not be reappointed.
Tags: Bailouts, Economics, Federal Reserve, Integrity, Money and Banking, Politics, Transparency 
Good point. I posted this on my class website.
Tom E. Snyder | Sep 13, 2012 | Reply
More than this needs to published on a school board wall. Obama and George Soros have been pulling out all the stops to bring down the economy. Soros to the Feds to do this. Obama and Hillary keep going into muslim countries and bringing down there leaders in the name of Arab Spring and now look what we have no control over in the middle east a threat to the whole world now. No wonder Russia and China are saying no more. We are destabilizing the world and they know it. That is why they are backing Syria. Syria has Christian, muslim other religions they have gotten along for years no problem then America comes in and tries to take down Assad for what to destabilize the middle east just like they are doing to America so they can bring in the New World Order how scary is this. These people are nuts. These kids need to be told the truth. There America is about to fall and half of America does not believe and is voting for Obama anyway. Tell the truth not just half the truth before they are wondering what really happened to America.
Rotties4 | Sep 17, 2012 | Reply
Crony Capitalism is the game of the 21st century... and almost the last half of the previous century as well. There’s another name for it that few want to admit to: Fascism. Both FDR & Mussolini defined fascism as the power of Big Business married to the power of the State. This is why voting in our country essentially is meaningless. The “two” major political parties are, in reality, branches of the only major party in America: the Mega Corporatist Party.
Scott Haley | Sep 17, 2012 | Reply
“The Fed has moved from engaging in monetary policy in a way that was neutral toward various businesses and industries in the economy...”
The policy may have been neutral from a purely political standpoint, but it was not and never could be from an economic one. Manipulation of the money supply has decidedly non-neutral effects as has been explained by writers since Cantillon. And as a person approaching retirement, I can tell you that for savers, the effects are anything but neutral.
ArbutusJoe | Sep 18, 2012 | Reply
You are absolutely right, ArbutusJoe. My qualifier was “neutral toward various businesses and industries in the economy...” But yes, activist monetary policy distorts price signals in the economy and results in resource misallocation, which the the foundation for Hayek’s business cycle theory and the Austrian school monetary theory that has built on Hayek. And yes, it is quite clear that the Fed’s policies over the past decade have imposed substantial costs on savers. You have a legitimate gripe.
Randall Holcombe | Sep 18, 2012 | Reply
I say we end the use of violence. No gold standard, no fiat policy cartel, no legal tender laws, and no personal taxes of any kind. Let’s have freedom in money! Central planning doesn’t work. After the 20th century, people STILL haven’t learned this?
Fellow Traveler | Sep 18, 2012 | Reply
Your thinking is good up until the end. I believe that Romney would have no problem re appointing Big Ben.
Bags | Sep 18, 2012 | Reply
Good luck on that one, Fellow T. They (the people that spend our money) would sooner give up breathing than give up personal taxes.
Bags | Sep 18, 2012 | Reply
Interesting comment, Bags. Romney has already said if he’s elected he won’t reappoint Bernanke, but politicians frequently say one thing and do another.
Randall Holcombe | Sep 18, 2012 | Reply