Tuesday, August 11, 2009

Who's the Pig's Head?

Typically, I'd just tweet a funny link but this one really deserves a bit more attention. A comic over at Abstuse Goose combines The Lord of the Flies with a fictive history of the Federal Reserve. The joke takes the expense that with a Federal Reserve system the lost boys could fund elaborate weapons production and make the ensuing madness more "civilized."

Sure the error in the this comic, which I often make mentally, is to equate the Fed as an established institution. The first panel purports to create a "government and Federal Reserve Banking System" all in one stroke. In reality, Treasury came along with the Washington Presidency but we don't get the Federal Reserve Act until 1913. Even then the structure of Fed Independence that we know today isn't enshrined until the Fed and Treasury reached The Accord in 1951 over who would manage debt.

More than a historical lesson, the Fed faces revision today. The Administration's financial regulatory reform plan would turn the Fed into a systemic regulator. The comic doesn't assume such a role for the Fed, in large part because the intuition already has important goals: price stability and full employment.

Volcker and Greenspan shaped a mysterious Fed. One that appears to have always existed. It hasn't. The current crisis could make the current Fed structure as ephemeral as we have believed it permanent.

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