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The Tea Party vs. the Fed

By Amitai Etzioni, Special to CNN
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STORY HIGHLIGHTS
  • Amitai Etzioni: Fed's new stimulus policy is drawing criticism
  • Tea Party voices are speaking out against Fed for not being accountable to the public
  • Etzioni says Fed is more effective than other major arms of government
  • He says Congress needs to function better, and Fed's wings eventually need to be clipped

Editor's note: Amitai Etzioni is a sociologist and professor of international relations at George Washington University and the author of several books, including "Security First" and "New Common Ground." He was a senior adviser to the Carter administration and has taught at Columbia and Harvard universities and the University of California, Berkeley.

Washington (CNN) -- The Fed just injected $75 billion into the American economy, the first of eight such gigantic booster shots. The huge stimulus has unleashed a chorus of criticism by Republican economists and politicians, as well as criticism from the leaders of China, Germany, and the United Kingdom.

Even more profound criticisms have been voiced by Tea Partiers. They see the Fed as utterly undemocratic and unaccountable. Rand Paul, a leading Tea Party figure, calls for abolishing the Fed. The Maine Republican Party made this position part of its official platform.

My liberal colleagues point to these criticisms of the Fed as proof positive that the Tea Partiers "just don't get it." The liberals snicker: "What do they want? To go back to the days when each local bank was free to issue its own currency and to default at will?"

Actually, the Tea Party's criticism of the Fed is valid, although misdirected.

A recent compelling piece of evidence that the Fed is undemocratic can be gleaned from its decision to simulate the economy. Fifty-six percent of Americans hold that the stimulus already granted to the economy did nothing, and 18 percent think it harmed the recovery.

Congress hence felt it could not support more stimulus, despite the high unemployment rate and the anemic growth rate. However, the Fed decided to stimulate anyhow. Arguably this was a good decision. However, this does not change the fact that there is precious little Congress and the president combined can do about it.

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Moreover, the way the Fed makes decisions is anything but democratic. Once the board members are appointed -- following nomination by the president and confirmation by the Senate -- they cannot be removed for their positions on policy matters and do not need to stand for re-election. If this does not mean that the Fed is unaccountable, I don't know what that word means.

Dissent is not welcomed. As Alan Greenspan put it, "We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible lose control of a process that only we fully understand." Members do express differences, but these are often muted. Most important, by custom, the chairman can and often does overrule all other members. In short, calling the Fed "undemocratic" is a polite way of describing it. Autocratic would be quite appropriate.

Why put up with such a set-up? Because the Fed is the only part of our government in which there is no gridlock and no polarization; in which interest groups have no say; where decision-makers can rely on their reading of the facts and do what they believe is best for the country, free from political considerations.

To put it differently, if Congress did not function so poorly, and the White House and Congress ceased to be at loggerheads, we could be much less tolerant of the Fed. However, these days the Fed is often the only part of the government that works effectively -- which is like flying a plane on one remaining engine: You do not want to shut it down.

There is only one catch, albeit the mother of all catches. Like all autocrats, its governing is attractive when compared to the mess democracies typically serve up -- until it makes a grand mistake. Then there is no way to stop it. This is exactly what happened with Alan Greenspan, who was long revered. But then he lowered interest rates too much for too long and supported excessive de-regulation, creating huge real estate and stock market bubbles. He refused to admit that they existed or to let the air out of them. There was no stopping him -- and the Fed turned into a major culprit for the 2008-10 Great Recession.

What is to be done? The Tea Party is right that this is a poor way to run an economy. If Congress stimulated more now and committed itself -- now -- to raise taxes and cut spending once unemployment falls, say, below 7 percent, we would be able to rely much less on the Fed.

However, the Tea Party misdirects its ire. To get to a balance between what is called fiscal policy (done by Congress and the White House) and monetary policy (the job of the Fed), we need first to fix Congress, to make it serve the public at large rather than narrowly-based special interest groups, learn to bridge partisan differences and occasionally cooperate with the White House. Only then can we clip the Fed's wings, which ought to be cut.

The opinions expressed in this commentary are solely those of Amitai Etzioni.