The Federal Reserve and the Right

Consider me vexed by the glut of pro-Fed conservatives who seem to exist at times just to bash those of us who lament the very existence of central banking. The point of Ron and Rand Paul agitation against the Fed isn’t to convert us back to gold immediately. It’s to raise awareness on an incredibly complex and opaque institution that approximately no one understands. Rome wasn’t built in a day and the Federal Reserve isn’t going to be reigned in and/or dismantled at once either.

In light of the discussion surrounding Yuval Levin’s new book The Great Debate: Edmund Burke, Thomas Paine and the Birth of Right and Left, it’s fine for some conservatives to champion monetarism and cite Milton Friedman and advocate a more tempered attitude towards the Fed. That would be considered a Burkean approach because it takes the world as is and tries to build on what works (“its best self). And for all its flaws and infringements on good principle and sound economics, the central bank does work to a degree, and there are arguments that can be mounted in defense of it. Many respected writers on the right, including Ramesh Ponnuru and James Pethokoukis, defend monetary policy on the grounds that it has largely generated stability while preventing deflationary cycles that end with catastrophic runs on banks. But it’s more important in my view to adopt the Paineian approach and take a principled stand on the very idea of central banks. Thomas Paine believed fervently that every generation enjoyed its own autonomy and that no generation was really bound to its past. Contra Burke, who viewed the past as predicate and emphasized the preservation of institutions and of all the things that are “good” in a society as the true means to achieving progress, Paine saw every custom or cultural institution as a shackle. I’ll have a lot more to say on the fascinating debate between Burke and Paine, as I still am not sure if I agree with Levin’s ultimate siding with the Burkean disposition, especially as it relates to politics in 2014. The Paineian impulse to rely on reason and principle over tradition and custom in a quest to remake society anew according to each successive generation’s own desires explains why Levin asserts that Paine was an important precursor to the idea of the left. That he went on to fully endorse the French Revolution and its obsession with eradicating all remnants of French history supports this claim. When aimed at corrupt institutions though, Paine’s radicalism certainly has its merits, and principled opposition to the institution of the Federal Reserve would certainly have earned plaudits from Paine. The free market and the prosperity that flows from it is an organic process that is only corrupted by arbitrary third parties, and Paine loathed anything with arbitrary power to infringe on individual rights. Powerful and untrammeled as it is, the Fed cannot ever possess enough knowledge to know what optimal rates, yields or prices should be. It can get lucky guessing on occasion, but it can never know as much as the invisible hand.

My question for pro-Fed conservatives who tout their Burkean incrementalism in addressing problems with the central bank and who urge prudence and caution among those flying the End The Fed flag is simple: why is Burke’s method of building upon status quo institutions rather than abolishing them and starting over applicable to the Federal Reserve but not to the welfare state generally? Few if any modern conservatives are proponents of the welfare state – in principle and practice – and most of us are rabid Paine acolytes when it comes to our wishes to curtail both the welfare state and the permanent federal bureaucracy, and “curtail” is probably putting it lightly. Most conservatives and libertarians in 2014 want to see a comprehensive abolition of executive agencies, bureaucratic departments, and welfare state programs. That is not exactly a Burkean outlook. So why do most establishment conservatives insist on Burkean politics regarding the Fed while emulating Paine in their desire to see our government reclaim its first principles?

I understand there are cogent arguments for Fed-provided stability, particularly in the realm of inflation and deflation. Neither is desirable, but inflation is usually preferable to deflation, and the Fed has done a decent job at times of keeping inflation in check while effectively neutralizing the threat of deflation entirely. The problem is that central bank currency printing and bond purchasing alike create illusions of stability and growth while concealing the fact that markets and industries are just receiving distorted price signals which result in a mis-allocation of resources. The very instruments the Fed deploys to facilitate a stable business cycle contribute paradoxically to its volatility. Central planners can’t eliminate the boom-bust cycle in part because they themselves are responsible for it. It’s true that there were panics and crashes prior to the establishment of the Federal Reserve. But the introduction of the Fed did nothing to ease the trend; we’ve had as many or more wild rides with the economy in the Fed era than not. Bubbles form when credit is recklessly expanded, and you don’t need a central bank to recklessly expand credit. Whether you’re looking at the Panic of 1819 or a liquidity crisis of the late 1890’s, volatility and boom-bust cycles are always a risk, central bank or no.

The Fed creates false incentives (i.e. bubbles) that always lead to crashes. Bubbles are vile because lots of wealth and resources get woefully misallocated, but few are aware of the mal-investment due to the Fed’s instruments (like QE) that cloak and conceal the distortion. I understand Milton Friedman’s Burkean insight that central banking is probably here to stay so conservatives might as well figure out how to deal with it and make it least harmful to the market economy as possible, and to a large extent conservatives have succeeded in this arena. Ronald Reagan and Paul Voelcker’s partnership in the early 80’s showed how conservatives can work with the Fed Chairman to combat the rampant inflation carried over from the 70’s. But economic imperatives like inflation, energy prices and stagnation are very different today than they were at the dawn of the Reagan Revolution. Because Reagan succeeded so thoroughly in launching a three decade plus paradigm shift in American economic optimism and output, circumstances have changed (for the better) and the pressing demands of today’s stagnant economy have changed as well. As the progressives continue to cement chronic unemployment as a “new normal” and behave with utter hostility towards the private economy, conservatives need to point out that the income inequality progressives are going on about has only been made worse by their policies and the Fed’s ability to hide the true nature of a pathetic economy through money printing. Oh, and all that quantitative easing and debt monetization did was enhance the balance sheets of some very big and very wealthy banks.