Some sense from The New Republic

The New Republic has often drawn my ire for its steadfast support of the status quo, its corporatism, its hostility to the consumer, and, at times, its open agitation for war. I therefore take all the more pleasure in directing you to this informative piece on the Federal Reserve and its bungling of our current crisis. One would hardly expect such clear analysis from a publication whose role is to manufacture consent for the Fed’s policies, and one hopes such criticism portends a more vigorous phase in the magazine’s long and illustrious career.

After a short outline of the Fed’s birth and original purpose, TNR focuses on the organization’s role in the various booms and busts of the past 30 years. Startlingly, TNR asserts the Fed’s centrality to the boom-bust cycle, overturning the conventional wisdom that our central bank is merely an observer, able to lend a push in one direction or a pull in another, but largely helpless to shape the overall landscape. In their words:

The decisions he made during the recent crisis weren’t necessarily the wrong decisions; indeed, they were, in many respects, the decisions he had to make. But these decisions, however necessary in the moment, are almost guaranteed to hurt our economy in the long run–which, in turn, means that more necessary but harmful measures will be needed in the future. It is a debilitating, vicious cycle. And at the center of this cycle is the Fed.

Strong words; and a few even stronger:

Enabled by the Fed, our system’s tolerance for risk is out of control. This is an increasingly dangerous system. It is only a matter of time until it collapses again.

The New Republic attributes this risk to the age-old complaint: bankers and CEOs are simply not punished for poor performance – on the contrary, they are rewarded with dollar amounts we mere mortals can hardly fathom. For evidence they cite Citigroup’s $100 million CEO pay packages to Robert Rubin and Chuck Prince – some of the main architects of our current boondoggle.

When discussing solutions, unfortunately, TNR once again displays its establishment colors. The recommendations it puts forth are mostly watered down, and appear limp when compared to the magnitude of the problems they address.

“Reasonable personal liability” for failing CEOs sounds nice, but will inevitably translate to a small slap on the wrist. Contrary to popular belief, there is not a large difference between a $200 million annual paycheck and a $100 million paycheck. What seems like “reasonable liability” to most CEOs still leaves them unconscionably rich. We must truly divorce ourselves from the idea that as a financial leader you can bankrupt thousands of people and still walk away rich as a Midas. If this means the CEO goes bankrupt with his shareholders – well, so be it. Nobody said banking was a safe business.

Likewise with their reccomendations regarding conflicts of interest. The New Republic advises a “cooling off” period for public servants who enter a regulatory position after making their fortune in the private sector (for example Hank Paulson, who retained his Goldman Sachs holdings while serving as Treasury Secretary).

This is not enough. If our crisis has taught us anything (something which remains to be seen), it is that financial ties run deep, and are often not erased by time. It is ludicrous to appoint to a regulatory position anyone who has ever had anything to do with the financial industry. Such conflicts of interest are inherent – “cooling off period” or no.

A weak finish to an otherwise outstanding article.