October 23, 2015
In a NYT review of Roger Lowenstein’s book on the Federal Reserve Board, Robert Rubin touts the virtues of the Fed’s independence from political control. He decries efforts to make the Fed more accountable to Congress.
While the Fed may not feel as though it must directly respond to Congress, that does not mean it is not responsive to political pressures. In the last thirty five years, it has maintained policies that have on average kept the unemployment rate almost a full percentage point above the Congressional Budget Office’s estimate of the non-accelerating inflation rate of unemployment (0.5 percentage points excluding the Great Recession). By contrast, in the prior three decades the unemployment rate had averaged half a percentage point less than CBO’s estimate of the NAIRU.
Source: Baker and Bernstein, 2013.
The higher unemployment acts as an insurance policy against inflation. The higher unemployment kept millions of people from working and deprived tens of millions of workers of the bargaining power needed to secure real wage increases. While modestly higher inflation would be a matter of little concern to most workers (especially since it is being driven in part by higher wages), it would be very upsetting to the financial sector since the value of the debt they own would be reduced.
The financial industry has a grossly disproportionate influence on the Fed due to its design. They largely control the 12 district banks. In addition, the governors appointed by the president tend to be more responsive to the concerns of the financial industry than other sectors of the economy. It is certainly possible that if the Fed were not so tied to the financial industry, it would have paid more attention to the housing bubble as it was growing. The industry made huge amounts of money from the mortgages that fueled the bubble. (In this context, it is probably worth noting that Mr. Rubin made more than $100 million from his position as a top executive at Citigroup during the bubble years.)
For these reasons, the public may not be as happy about the Fed’s lack of accountability to democratically elected bodies as Mr. Rubin. Many might prefer a central bank that is concerned more about workers than bankers.
Addendum:
On this topic, it is probably worth noting that in 2014 Robert Rubin, together with Martin Feldstein, argued that the Fed should be prepared to use higher interest rates as a tool to combat bubbles.
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