The Stock Market And The Federal Reserve Board
Policy Makers Hone Debate: When to Hold, When to Fold
Richard W. Stevenson
The New York Times, September 3, 2002, Page C1
This article reports on the discussions at the Federal
Reserve Board's annual meetings in Jackson Hole. At one
point, it reports the assertion of Lawrence Meyer, the
former vice-chairman of the Federal Reserve Board, that
the Fed could not have publicly pointed out the
irrationality of the stock market during the recent bubble.
According to Meyer, this would have destroyed wealth
and "that's a politically untenable situation for a central
bank to be in."
Mr. Meyer's assertion is enormously important and
should have been the central focus of this article (which
would belong on the front page). The stock bubble was
extremely damaging to the nation's economy (the bubble
wealth was temporary and illusory). It led to hundreds of
billions of dollars in wasted investment in telecoms and
other tech sectors. It also caused millions of workers to
save too little for their retirement or their children's
education because they assumed that the bubble prices
of their stock holdings would endure. In addition, the
federal government grossly overestimated capital gains
tax revenue in its tax and spending decisions.
There is little dispute about these negative effects of the
stock bubble. However Mr. Meyer is arguing that for
political reasons, the Fed could not have taken steps to
prevent the growth of the bubble. The Fed is designed to
be politically independent, with 7 members of its core
decision making body appointed by the President
(subject to congressional approval) to 14 year terms, and
the other five appointed through a process dominated by
banking interests.
While this process is often defended as allowing the Fed
the freedom to act in the nation's overall economic
interests, Mr. Meyer is suggesting that political interests
still prevent the Fed from doing what it views as best for
the economy. Presumably he is referring to the financial
interests that would have been hurt most immediately by
the Fed's efforts to deflate the bubble. This claim about
political restrictions on the Fed's conduct is a powerful
argument for altering the Fed's structure. It suggests that
in order for the Fed to be free to act in the nation's
economic interest, the influence of the financial industry
will have to be reduced.
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