(I had submitted this article to the op-ed pages of The Washington Post on November 18, 2009)
In the business of ideological intelligence, the history of espionage since ancient times has a continuous vein of moles in enemy territory, whether that is seductresses or FBI moles in the mafia or CIA agents abroad. Conservative small government plants in a pro-government institution since Woodrow Wilson can easily pass for conservative central bankers.
There is indeed a simple but cogent case as to why the Fed is no longer needed: the politicians understand the importance of stable prices since Paul Volcker. After all, they make the law and they can therefore also write-in the technicality of an explicit numerical range for the change in price level and let the president, who makes the budget, deal with stable prices and unemployment in that context. The Secretary of the Treasury, as was the case before 1913, would then be answerable both to the Congress and the Press.
That would achieve full transparency, just as there is with the federal budget, but for the clamor of interest group politics and their paid lobbyists. The interest group shadows as to Fed policy are far too convoluted and hidden for most people to understand, including Richard Nixon who had called it “technical” when the United States exited from Bretton Woods. He was fortunate in that the technicality played out more honestly at that time in the interest of the United States. Now it is not. That it has not been was perhaps recognized early on by Paul Volcker as he left the Fed, and then by Alan Greenspan and now Ben Bernanke, for the floating dollar, in an asymmetric world of fixed and floating exchange rates had devastated the U.S economy after the energy price shocks in the ‘70s.
Two things needed to be done: first, the politicians had to be convinced of the merits of stable prices, and second, the asymmetry of the global exchange rate regime had to be changed to become more homogeneous after the gradual demise of the gold standard as currencies around the world shifted to the collateral of their gross domestic products instead of chasing gold around the world.
Both of these arguments have been won at a wrenching price: first, with the Volcker disinflation and second, with the financial crises around the world, not excluding Europe, from west to east, including Great Britain which made George Soros a very wealthy man, almost overnight.
The wisdom of depending on crises to change the world is another matter. It was never wise. This perhaps needs a change of political culture, not only in the United States but around the world, for not only economics, but international relations and especially international relations, were not immune to brinkmanship either. In fact, the brinkmanship in economic policy was largely driven by the culture of brinkmanship in geopolitics.
If all of these battles have been won, and the war of changing the geopolitical culture of the politics of brinkmanship is the last hurdle in the path of achieving peace through civility in the world, then why continue the Fed if not to justify its existence to fight imaginary battles?
Civility in geoeconomic engagement can once again be integrated as a matter of law into democratic politics.