On Thursday our national newspapers were splashed with front-page headlines and articles dealing with Obama's 'sweeping financial plan,' which as the Wall Street Journal suggests, would amount to an "Historic Overhaul of Financial Rules."
If we open up the Wall Street Journal to page 8, we then read, "The proposal, if passed into law, would represent one of the biggest changes ever in the Fed's role. The central bank would win power to monitor risks across the financial system, and sweeping authority to examine any firm that could threaten financial stability, even if the Fed wouldn't normally supervise the institution. The nation's biggest and most interconnected firms would be subject to heightened oversight by the central bank."
If you take President Obama at his word, the changes are necessary because, "millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight."
How about, before each of us chooses to waste any amount of time reading the many articles written on the subject, let us first clarify one subtle detail: and that is, even though most of us know that we're ultimately affected by Fed policy, very few of us actually understand what the Fed does, either before or after these changes.
In other words, how are we to assess the intelligence or fairness of this proposal if we:
- know essentially nothing of the Fed's history
- or why it was first created
- or how it has evolved
- or how it is now structured/organized
- or how it shapes and implements its policies
- or what the legal framework is that it now operates under
- or what legal framework originally gave this institution a public life.
Truly if you're like most Americans, if the Fed has caused enough stir in your life to get itself noticed, it continues to be that mystery of mysteries that just so happens to operate in full public view. Furthermore, as there are few among us that have the desire or patience to fully understand this mystery, let alone explain it to others, most of us continue to be lost here. And we certainly won't have this mystery explained by reading the Wall Street Journal.
Indeed, after two years of looking at broad governmental policy within the framework of my own burgeoning knowledge of the Fed (learning a good many things that I, too, did not know), I can now confidently conclude that, not only is the Federal Reserve the single most powerful institution in this country, it's probably the single most powerful (national) policy-making body in the world.
And it's precisely because we know so very little about this body that it maintains all this power.
Let us take a closer look lest our ignorance gets the better of us.
Say you're a biologist and you've accidentally discovered a strange bird, a previously undiscovered species. Now just because this species of bird is entirely new to you doesn't necessarily mean that you must redesign classification systems or rethink the laws of physics to understand it. Of course not. Instead, try working logically and methodically, perhaps by first noting the bird's physical characteristics, its behavior, its natural surroundings. And answer questions like, what are its color patterns? And how is it shaped? And how does it protect itself from dangers? And what does it feed on?
The same thing can be true of studying the Federal Reserve.
The thing with the Fed is, like the whale, it looks different than what it truly is. For years the whale beguiled naturalists and marine explorers because they couldn't make sense as to why this "fish" had lungs, a warm-blooded circulatory system, a mammalian reproductive system, and looking even closer, vestiges of legs by which (they later discovered) were once used to walk on land. In other words, the whale's overtly 'fishy' behavior confused humans in relation to its awkward 'mammalian' characteristics, a confusion which was cleared up only after a close, thorough, and methodical investigation.