Wednesday, October 13, 2010

Our Bipolar Relationship with Central Banking

For 219 years, the United States has indulged a funny-if-it-wasn't-so-awful bipolar impulse with regard to central banking and -- more relevant for our purposes -- housing lending.  We have an ideological distaste for central banking authority that stretches back to Jefferson, who did has damnedest to kill the First Bank of the United States, and to Andrew Jackson, who killed the Second.  The reason there was a Second, after the First had been killed, was that some sort of central banking authority is absolutely necessary in times of economic crisis to restore order, and in times of economic stability to preserve order.  The problem is: it's ideologically distasteful for a federalist nation to have a a central bank, so as soon as a crisis passes, we kill it, or at least neuter it.  Until, that is, the next crisis arrives.  Following stability and, therefore, the death of the Second Bank, the United States entered into a long period of Panics that make this recession look very tame, that lead eventually to the establishment of the Federal Reserve, a central bank in almost all but name.  It was a weak institution at first, but its power expanded in response to the Great Depression.  


Also in response to the Great Depression, we created a whole bunch of central housing lending authorities such as Fannie Mae that worked in system with each other very well.  But in a way they killed themselves by working too well -- all that successful lending looked good to the private sector, and what was a capitalist country doing with so much public control of lending anyway?  So, one by one the successful authorities were killed or privatized.  Until, that is, the latest crisis arrived and we re-nationalized them.  As soon as things stabilize, of course, we'll re-privatize them.  It's an expensive hobby.

I wrote about this historically bipolar relationship a little while ago, and predicted that eventually, when the economy began stabilize again thanks in part to the Federal Reserve's emergency lending, we'd turn out gaze with disgust on the Federal Reserve and wonder why we had this powerful central banking authority anyway.  I was a little disheartened but not surprised to read in the New York Times, therefore, that the Federal Reserve is now a target of the same party that desperately relied on it at the end of the previous administration.

Mark A. Edwards

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