To use the term “moral values” and the U.S. Federal Reserve in the same sentence may be laughable — and today, it most certainly is. However, there was a time when the Fed chair was elected because of their fiscal discipline, regardless of their own political affiliation or the prevailing sentiment of the time. In this politically divisive environment we are in, the history of the Fed serves as a reminder of who really controls our nation. In turn, future elections should regard candidates who demonstrate an aptitude towards high-level economics.
Much has been made of President Barack Obama’s nomination of Janet Yellen to the highest seat of the Federal Reserve — the first woman to do so. From the perspective of the liberal left, this nomination represented a remarkable achievement in progressive ideology. The breaking of the glass ceiling supposedly opened a pathway to true gender equality. But in reality, Yellen’s promotion was merely an individual act of equality. The truth is, Yellen is acting just like “the boys.”
Taking the mantle from Ben Bernanke, Yellen oversaw the first interest rate hike in several years. At that point, the market looked prepared for a rate hike. But with the markets mostly moving sideways since April — the benchmark S&P 500 is up 1.3% since April 1 — it appears more than likely that Yellen, like her predecessor, will turn dovish.
Today, we have accepted the fact that the Federal Reserve is Wall Street’s fail-safe. While it wouldn’t be entirely fair to label the Fed as their lapdog, there’s no way that the central bank would allow the markets to completely collapse. Thus, investors are incentivized to amp up the risk with exotic financial instruments that are borderline maniacal. What’s the point of moderation when the Fed will save everyone from their own stupidity?
However, this was contrary to the policy framework proposed by former Fed chair William McChesney Martin. Rather than to appease Wall Street by suggesting a dumping of money via helicopter to prevent deflation, Mr. Martin put traders and bankers alike on notice. Rather than catch them if they fell, he proposed lowering the height of their risk. From there, if they fell, they fell.
This was characterized by one of his most famous quotes: “”The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” How remarkably different that is from today’s Fed, whose de-facto job is to provide the punch bowl, not take it away!
It’s no coincidence that Martin is the longest serving Chair in the Fed’s history. He was also a devout Christian, and came from a strict Presbyterian family. Martin is an example of a “good guy” in a very secular and controversial role. He laid out the blueprint for what it takes to lead the country in turbulent times while maintaining personal and professional integrity.
He also proved that it’s not the system that matters, but the operator.