DiMartino Booth - Fed up: an insiders take on why the Federal Reserve is bad for America

Never in the field of monetary policy was so much gained by so few at the expense of so many.

M ICHAEL H ARTNETT, B ANK OF A MERICA M ERRILL L YNCH CHIEF INVESTMENT STRATEGIST, N OVEMBER 1, 2015

E arly morning, December 16, 2008, with a drizzle of freezing rain falling, few would even glance at the line of inconspicuous Mercury Marquis sedans pulling up to Washington, DCs Fairmont Hotel. Emerging from the luxurious four-star establishment, their Foggy Bottom home eight times a year, are eleven little-known bureaucrats with their contingent of requisite subordinates.

There is no fanfare to mark the coming momentous decision they are to take on as they comfortably settle in for the ten-minute caravan to the neoclassical white marble edifice known as the Marriner S. Eccles Federal Reserve Board Building, located at Twentieth Street and Constitution Avenue NW.

Another half dozen of their peers had already left their homes in nearby Georgetown or some other Washington suburb and they too are making their way to the same address for the all-important 9 A.M . meeting.

Only one of these bureaucratsthe chairman, a mild-mannered former professormight have been recognized in an American airport. The restunelected, immune to political pressure, mostly academics, and save one, inexperienced in the intricacies of running a major corporation, or even a small businesswere virtually invisible outside the narrow world they inhabited despite the enormous power they wielded.

As these seventeen people arrived, they stowed their coats and umbrellas, grabbed a cup of coffee or tea, and mingled, the low hum of their conversation perhaps more subdued than on similar occasions. The day before, the first of the two-day affair, had been extraordinary in both the dire picture it painted of the American economy and the realization that they would have to take bold and unprecedented action.

That next sleety morning, they met again, determined to take action to prop up a faltering Wall Street, hopelessly mired in the greatest financial crisis since the Great Depression. Even as they convened, the wreckage of the previous three months still burned around them. Credit markets had seized up and fears for the fate of the economy were mounting.

With a few exceptions, virtually all of those at the meeting were PhD economists who had earned doctorates at MIT, Yale, Harvard, Princeton, and other top American universities. They met under the auspices of the Federal Open Market Committee (FOMC), the decision-making body of the Federal Reserve System. They believed a lifetime of study in economic theory and monetary policy had given them unique insight to steer policy for the most powerful central bank in the world, the lender of last resort for failing Wall Street banks, and the U.S. governments last line of defense against utter financial chaos.

Created in 1913 after the Panic of 1907, the Federal Reserve was founded to keep the publics faith in the buying power of the U.S. dollar. After failing miserably in the 1930s, the Fed aimed to be more responsive. This led the institution to find discipline in the rising macroeconomic models championed by top monetary theorists. During the ensuing Quiet Period in American banking, deposit insurance prevented panics, the Fed controlled interest rates and manipulated the money supply, and though occasional disruptions flared, like the failure of Continental Illinois National Bank and Trust Company in 1984, no systemic risk erupted for seventy years. The Fed had tamed the volatile U.S. economy.

Until September 2008, when all hell broke loose in a worldwide panic that completely blindsided and, embarrassed the Federal Reserve. The Fed had used billions of dollars in taxpayer funds to bail out Wall Street fat cats. Everyone blamed the Fed.

Just before 9 A.M ., the door to the chairmans office opened. Federal Reserve Chairman Ben Bernanke took his place in an armchair at the center of a massive oval table. The members of the FOMC found their designated places around the table; aides sat in chairs or couches against the wall. With staff, the room contained fifty or sixty people, far more than normal for this momentous occasion.

In front of each FOMC member was a microphone to record their words for posterity. To a casual observer, the content of their conversation would be obscured by economic jargon.

This day, their essential task was to vote on whether to take the fed funds ratethe interest rate at which banks lent money to each other in the overnight marketto the zero bound. The history-making low rate would ripple throughout the economy, affecting the price to borrow for businesses and consumers alike.

Bernanke was calm but insistent. His lifetime of study of the Great Depression indicated this was the only way. His sheer depth of knowledge about the Feds mishandling of that tragic period was undoubtedly intimidating.

By the end of the meeting, the vote was unanimous. The FOMC officially adopted a zero-interest-rate policy in the hopes that companies teetering on the brink of insolvency would keep the lights on, keep employees on their payrolls, and keep consumers spending. It would even pay banks interest on deposits.