They Hate the Fed

America’s animosity toward central banks dates to the administration of George Washington, when Alexander Hamilton proposed the creation of a Bank of the United States to organize the debts of the states, establish a common currency, and promote manufacturing in the young nation’s economy. Thomas Jefferson feared that such a powerful joining of finance and state would lead to tyranny; Washington also had doubts but let the bank go ahead. Two decades later, Jefferson’s protégé, James Madison, allowed the bank’s charter to expire, only to realize he had made a mistake. He prevailed on Congress, in 1816, to create the Second Bank of the United States. It succeeded in establishing a uniform currency—a vital achievement—but Andrew Jackson loathed the bank as a bastion of financial privilege favoring East Coast elites. Jackson vowed to destroy the bank—and destroy it he did.

Foreigners could scarcely comprehend Americans’ disdain for central banks, which by the nineteenth century were vital to the financial systems of England, Prussia, France, and other states. Alexis de Tocqueville, who visited the US during the Jackson era, diagnosed the “intense hatred” of the Second Bank as a sign of America’s enmity toward central government. Later, after several serious depressions, Wall Street lobbied for a lender of last resort and, in 1913, Congress created the Federal Reserve.

But Jackson’s argument—that a central bank posed a dangerous threat to the private market, and would favor the interests of the powerful and rich—was raised by opponents of the Fed in 1913, and it has been raised one hundred years later by the critics of the current Fed chairman, Ben Bernanke. The difference is that while populist anger against central banks previously came from the political left, these days the attacks on the Fed come mainly from the right. Such is the case with Jim Bruce’s film Money for Nothing: Inside the Federal Reserve, which presents a historical account of the institution, focusing on the recent mortgage crisis, to mount a withering assault on the policies the Fed is employing to revive the economy today.

The pivotal scene in Bruce’s movie takes place during the dark early days of the twenty-first century. America has just been through a recession (as well as the September 11 attacks), the country is in a demoralized state, and the then Fed chairman, Alan Greenspan, is worried that its torpid economy might slip into deflation.

Not everyone agrees that this is a risk, but a fuzzily bearded Fed governor named Ben S. Bernanke is supplying Greenspan with intellectual backup. In 2002, Bernanke gave an address in Washington, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in which he outlined a program to avert the sort of deflationary trap that snagged the US in the 1930s and Japan since the early 1990s. Among the steps Bernanke recommended was cutting interest rates. And in the early 2000s, Greenspan cut the overnight interest rate—at which banks themselves borrow money—so low that a character in the movie says, “You could scarcely see it, it was so tiny!”

This is meant to sound eerily familiar today—after all, we have just been through a much worse recession, and interest rates are even lower, close to zero. The film argues that cheap money caused the mortgage crisis that came to a head in 2007 and 2008. If reducing overnight rates to one percent didn’t work then, Bruce argues via the narrator and a series of interviews, why is Bernanke following a more extreme version of the same policy now?

This question is sure to arise in the confirmation hearings for Janet Yellen, whom President Obama recently nominated to succeed Bernanke. Yellen, the Fed’s vice-chair and a strong Bernanke supporter, could face significant opposition. (Indeed, the same anti-federal rancor emerged in the recent controversies over the government shutdown and the debt limit.)

Previous to Bernanke, the most recent Fed chief to encounter popular opposition was Paul Volcker, who presided between 1979, when inflation was running rampant, and 1987. Volcker jacked up interest rates to an astonishing 20 percent—effectively so, since this policy succeeded in taming inflation. However, working Americans paid a price—two brutal recessions—and Democrats charged the Fed with kowtowing to Wall Street.

Critics today similarly assert that Bernanke is Wall Street’s tool. However, Bernanke has faced very different challenges than Volcker, and his responses have been correspondingly different. Essentially, Bernanke has tried to head off a depression by lowering interest rates and, by means of bond purchases, providing the economy with large doses of credit. Although inflation has been modest while he has been chairman, he is often charged with depreciating the dollar by printing too much money. The fear among monetary purists is that by purchasing bonds from banks, Bernanke is setting the stage for inflation later. On the far right, this is regarded as little short of treason. During the 2012 campaign, Rick Perry warned Bernanke not to set foot in Texas, and Newt Gingrich quite falsely labeled him “the most inflationary” Fed chief in history.

Money for Nothing picks up this thread; indeed, Bruce begins by expressing astonishment that the dollars Bernanke prints are based on “faith” (that is, not on gold) and implies it is only a matter of time before the world loses confidence in greenbacks. Nostalgia for the gold standard is a staple of Fed detractors, who tend to depict bullion as an unalloyed, and infallible, arbiter of monetary policy. In fact, in the latter part of the nineteenth century, when the US actually was on a gold standard, the country suffered prolonged bouts of deflation and frequent panics and slumps that were exceedingly painful for farmers, laborers, and others.

Bruce taps into gold’s sentimental appeal, with plenty of footage of shimmering gold bars and a closing shot of Ron Paul calling for an end to the Fed, which echoes the title of a book by Paul, as well as a T-shirt and a popular bumper sticker. The movie doesn’t explicitly advocate a return to the gold standard or an end to the Fed, but it does argue for shrinking the Fed’s mission. Bruce elicits an on-screen comment from the investor Jeremy Grantham that monetary authorities should concern themselves only with preserving the dollar’s purchasing power, and abandon the Fed’s other congressional mandate—job promotion and economic growth.

Bruce is the coproducer of a previous film on Sierra Leone and, according to the publicity material, “a student of financial markets for over a decade.” Before the mortgage crisis, he shorted (that is, bet against) stocks of financial companies, the profits from which helped to fund his movie. He seems to believe that virtually everything bad that has happened to the US economy since the 1970s can be laid at the Fed’s door.

According to experts—investors, journalists, former regulators—quoted in his chatty documentary, first Greenspan and then Bernanke twisted the Fed’s mission beyond recognition. Instead of focusing on keeping the currency strong, they circulated large amounts of dollars and weakened the dollar on the international exchanges. Instead of leaving markets to sort out winners and losers, they bailed out Wall Street after the 1987 crash and in every subsequent crisis, encouraging speculation while punishing savers with ultra-low yields. According to what the journalist Jim Grant says in the film, Greenspan, ironically, ditched his right-wing principles for a leftish program of “the socialization of risk.”

Bruce grudgingly acknowledges that Bernanke halted the panic in 2008, but the chairman still comes off very badly, never more than when he is seen asserting, before the crash, that home prices were unlikely to collapse because they had never done so before, or when, more recently, he expressed “100 percent” confidence in his present course. Bernanke has hardly been perfect; he might have shown some humility.

But did he or Greenspan cause the mortgage crisis—and if so, how did they do it? Any fair rendering of the crisis—already the subject of three hundred books, according to a count by the financial analyst Gary Karz—should start with the fact that mortgage lenders created a bubble, of the type that has afflicted capitalism time and again. Banks provided mortgages to people without verifying whether they had any income or means of repaying loans, which set off an avalanche of borrowing. In myriad forms—subprime loans, teaser loans, “liar loans”—bankers issued mortgages that were destined to fail, and that they counted on reselling before it was clear whether payments on the mortgages would or would not be made. This is the classic bubble behavior.

Various other factors helped to promote, or failed to inhibit, this private market bubble. The list of contributing causes includes (a) faulty incentives that rewarded Wall Street traders for buying unsound loans; (b) incompetence or corruption at rating agencies that endorsed mortgage securities as safe investments; (c) abject failure to regulate new mortgages at various levels of government, including the Fed; (d) reckless behavior by Fannie Mae and Freddie Mac, the government-sponsored housing agencies; and (e) low interest rates, set by the Fed, that arguably motivated investors to seek the higher yields of mortgage products.

Catastrophes that have multiple causes do not lend themselves to simple theories of blame, and Money for Nothing is plainly dismissive of analyses that rely on a number of causes. Peter Fisher, a former Fed official, is seen in the film lampooning such an approach as “the great coincidence theory.” Bruce espouses what might be called “the grand villain theory,” for he almost exclusively blames the crisis on the Fed, specifically for inducing speculation through very low rates. The film even says banks that took foolish risks were merely responding, in a rational way, to Fed policy. Don’t blame Angelo Mozilo, the chief of Countrywide Financial, liar loans, or reckless traders—it was all the government’s fault. Thus, Money for Nothing uses the Fed’s assumed culpability to turn what was above all a private market failure into one by government.

Bernanke has argued that cheap money had very little to do with the mortgage crisis. (Other countries, such as Canada, also had low interest rates but did not have a bubble.)^* Certainly the Federal Reserve failed to crack down on shoddy standards in the mortgage industry. Before the crash, Greenspan, an ideologue hostile to regulation, rebuffed the suggestion of the late Fed governor Edward Gramlich that the Fed investigate mortgage lenders. While raising rates might have cooled risky lending, banning excessively risky mortgages could have stopped it. In other words, the problem wasn’t too much government, it was too little: regulation was woefully deficient.

Bernanke doesn’t get to defend his policies in this film (we see him only in carefully spliced canned footage), nor is anyone else allowed to make a case for him. Alan Blinder, a former vice-chairman of the Fed, is quoted thirteen times, but Blinder—either because he wasn’t asked or because such comments were excluded—never says here what he has routinely argued elsewhere: that Bernanke has been dead right to aggressively lower interest rates. Earlier this year Blinder wrote in The Wall Street Journal, “When it comes to supporting growth, the Fed is the only game in town.” Bruce does not mention this opinion either. Indeed, viewers of Money for Nothing would probably be surprised to learn that Blinder, and a majority of American economists, support Bernanke’s current policies.

The film quotes a skeptical remark in which Blinder raises a very good question. “We can borrow tons and tons of money at very low interest rates,” he says toward the end. “The problem comes in the long run: When is this game going to end and how is it going to end?”

Blinder means that Bernanke’s large-scale bond purchases have put the Fed in uncharted territory. We cannot know how difficult it will be for the Fed to unwind its $3 trillion balance sheet—that is, to sell off its extensive bond portfolio without precipitating a recession—and to return, in time, to normal interest rates. Bruce is right to wonder whether the medicine administered by Bernanke and Yellen is working, and right to question whether it may possibly be sowing the seeds of some future distress. But the film’s answer is freighted with the emotionalism that Americans tend to bring to the topic of central banks. In 1913, the Fed’s framers had to overcome a deep distrust, bordering on paranoia, so that America, like other countries, could have a lender of last resort as a bulwark against depressions. Money for Nothing is the latest installment in an old American tradition—bashing the central bank.