About ten days ago, I read with great interest a post by a Florida real estate agent and member of AR who wrote a very convincing blog post which argued that new Federal Reserve Chairman Ben Bernanke will single-handedly rescue America from the "laxity" of the Greenspan era.  And if you didn't know anything about economics or how the Fed works, you might actually have believed what that blog author was writing.

Spend an hour listening to former Federal Reserve Economist Edward Lotterman and you'll learn how inaccurate and misleading that AR blog really was.  Lotterman spent nearly a decade as a regional economist for the Fed in the 1990's.  During that time, he was responsible for preparing the Ninth Federal Reserve District's section of the Beige Book, the briefing which is compiled for every meeting of the Fed Open Market Committee.  So I think it is safe to say that Lotterman understands the workings of the Fed better than most Americans.

Lotterman says that "the most common error in reporting on the Fed is to overestimate the power of the chairman of the Board of Governors".  Regardless of who occupies the Fed Chair position, the job carries with it far less power than the public has been led to believe.  "The Fed is not a dictatorship", he writes.  Lotterman goes on to state that power over key market decisions at the Fed is "diffuse and not readily apparent". 

A couple of other informative points were provided in a recent Lotterman newspaper column:

• If the Fed decides at a particular meeting not to lower interest rates, it is because there is not a clear majority of members of the Open Market Committee who are in favor of such a rate cut.
• Bernanke has no authority to change monetary policy by himself. He must secure a majority vote in either the Open Market Committee or the Board of Governors, not an easy task.
• The Fed Chairman is bound to adhere to the Tax Laws handed down by Congress and the White House.

Former Chairman Alan Greenspan did NOT single-handedly ignite the housing "bubble" that developed during his term.  Again, the structure and governance of the Fed does not permit its Chairman to be solely responsible for policy decisions.  Greenspan did a great job of keeping inflation at bay during two tumultuous decades.  And he helped navigate the U.S. economy through a series of boom and bust cycles, under multiple Presidents who gave him a blank check to do so.

I agree with Lotterman when he writes, "Business reporters can be excused for missing details.  Wall Street gurus claiming to be Fed experts have less excuse".

Copyright © 2007 by Eric Kodner, All Rights Reserved