Don't Trouble Your Little Heads, Just Trust the Fed

This line would have saved NYT columnist Tyler Cowen a lot of ink, and made his point much more clearly. Mr. Cowen is upset that some people might suspect that the Fed is helping hedge funds and other investors who made bad bets. Cowen warns readers: "THE American public has a hard-enough time understanding relatively simple economic issues like the benefits of free trade, much less the Fed or monetary policy. So if the picture sticks that the Fed is a shill for hedge fund managers, or that it is treating homeowners unfairly, the pressure will mount for Congress to limit the Fed’s independence. Yet most economists, on a bipartisan basis, agree that relatively independent central banks have a better record of maintaining economic stability and keeping down price inflation." While all of us would like to be able to take Mr. Cowen's advice and trust the Fed, we live in the real world. The public has an interest in keeping markets liquid, but it has no interest in making it any easier for investors holding bad debts to dump them on less sophisticated buyers. If the Fed did not want to help out these investors, what was the rationale for encouraging banks to use mortgage backed securities as collateral for their borrowing at the discount window? This is not a normal practice. There have been many other occasions where the Fed's neutrality between interest groups can be questioned. (Is it really more important to keep inflation under 2.0 percent than to lower unemployment? Why did Greenspan and Bernanke find it impossible to say that we have a stock/housing bubble? It's touching that Tyler Cowen wants to reassure us that the Fed is neutral, but not very convincing.