Unfortunately the Op-ed in today’s Wall Street Journal by former Fed governor Gerald P. O’Driscoll, Jr. is hidden behind the pay wall.  In it, O’Driscoll provides ample justification for abolishing the Fed, or at least severely curtailing its purposes to that of only providing for a sound currency, dispensing with the nonsense that a central bank can do much about economic performance without risking the currency’s soundness.

The bottom line today is that the Fed today acts as a super-legislature, taxing and spending through its money supply manipulations, with no direct electoral oversight.  This is not the government contemplated by the framers of the constitution, and there haven’t been any subsequent amendments providing for it.  The constitution provides that the House of Representatives has responsibility for initiating the taxing and spending programs of Federal Government, not the Federal Reserve Board of Governors, which is never even contemplated therein.

Due to the recently-passed Dodd-Frank Financial Reform Act, the Fed was forced to reveal to whom it lent and how much during the financial crisis.  The total is a mind-boggling $3.3 trillion.  The Fed claims it made money on every transaction.  Really?  Then why did it even have to make them, if they were ultimately to be so profitable?  Couldn’t the resident investing genius and folksy bullshitter, Warren Buffett, have privately arranged for the transactions if there were money to be made?  Even Goldman Sachs, that claimed it would have survived the crisis without government assistance, particularly without the AIG bailout, borrowed from the Fed for a total of about $35 billion, in addition to the $10 billion cash infusion it received from TARP, and none of it includes the roughly $13 billion benefit it received from AIG’s bailout. 

The simple fact is that the Fed has now all but destroyed any notion of capitalism in the US.  Capitalism without failure is like religion without sin, and it is clear, no matter whether money was made or not, that bailing out every ailing business, from General Electric to General Motors to even Harley Davidson and McDonald’s Corp, and of course all of the financial system players, did nothing but ensure the continuation of businesses whose creative destruction may or may not have been of long-term benefit.  We’ll never know.

Incidentally, the Fed will always nominally make money, no matter what it does.  That’s what comes with the power of, well, making money.   Any entity that can create the money it is lending along with the money that is being used to pay it back, by definition should always “make” money.  The question  is what such monetary hijinks do to the value of the money.  Time will tell.