Beating up on the Fed used to make you an oddball. Does it still?

Commentary about business and finance.
Nov. 9 2010 3:26 PM

Fed-Bashing Three Ways

Beating up on the Fed used to make you an oddball. Does it still?

(Continued from Page 1)

Even the bitterest Fed critics can occupy the second circle. For instance, Rick Santelli, the CNBC reporter often credited with inspiring the Tea Party, said in late October: "I'm not going to stand here and tell you I think the Fed ought to be disbanded. … I personally think this Fed's heart is in the right place, but they're out of control in terms of trying to accomplish what their noble purpose is."

Santelli's words are anathema to occupants of the third circle, who do not think the Fed's purpose is noble. Kevin Duffy, who co-manages a small hedge fund called the Bearing Fund, says that criticizing Fed policy, rather than the Fed itself, is "a bit like dismissing Stalin and Mao as well-intended but not the right men for the job." Duffy's camp wants to return to the gold standard in order to check the Fed's power to weaken the dollar—the scarcity of gold limits how much money the Fed can print—but even that is just a half step. Best of all, the third circle believes, would be to seriously curtail or abolish the Fed altogether.

The argument goes something like this: The very existence of the modern Fed creates artificial confidence that there's a government backstop to the banking system. Maybe that confidence has helped to make bank runs a relic of the past—but maybe the threat of a bank run wasn't such a bad thing, because it forced bankers to be disciplined. Jim Grant, the founder of Grant's Interest Rate Observer and a longtime Fed skeptic, titled a 1990 piece "Bring Back the Bank Run." (Grant puts himself in my third circle but notes that he is "not so much against the existence of the Fed as its nature," meaning that if Fed's role in the economy were tightly circumscribed, it wouldn't pose the same problems.)

Advertisement

It's tempting to think of the members of the third circle as, well, oddballs. Certainly it seems pretty unlikely their aims will be realized. Not even the newly elected Tea Party candidates will necessarily back any major revamping of the Federal Reserve. When Ron Paul, the Republican congressman from Texas who is Rand's father and a hero to the third circle, was asked on CNBC on Nov. 8 whether his son was "Paul lite," he answered, "I think you have to wait and see how he's going to vote."

On the other hand, never underestimate the power of troubled economic times to make people rethink their beliefs. Paul also said that "a lot more people are looking at what we're talking about." In that same Bloomberg poll that found 60 percent of Tea Partiers favored reining in or abolishing the Fed, 45 percent of the general population favored the same thing. Murray Rothbard, the controversial libertarian economist who many consider the intellectual father of the anti-Fed movement, wrote in 1994 ("The Case Against the Fed") that if the Fed were to be abolished, then "the banks would, at last, be on their own, each bank responsible for its own actions. There would be no lender of last resort, no taxpayer bailout [italics mine]."

Hedge-fund manager Duffy lets his third-circle worldview inform his investment choices. And guess what? Between June 2002 and September 2010, his Bearing Fund returned 226.6 percent net of all fees, or 15.3 percent a year. That compares with a return of about 4 percent a year for the S&P 500, including dividends, over the same period. Maybe it's the rest of us who are the real oddballs.

Like Slate on Facebook. Follow us on Twitter.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

iOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

My Father Was James Brown. I Watched Him Beat My Mother. Then I Married Someone Like Him.

  News & Politics
Weigel
Sept. 17 2014 12:02 PM Here It Is: The Flimsiest Campaign Attack Ad of 2014, Which Won’t Stop Running
  Business
Moneybox
Sept. 17 2014 12:13 PM “For a While Liquidity Led to Stupidity”
  Life
The Vault
Sept. 17 2014 1:04 PM The War Department's WWII Advice Booklet for Soldiers Headed to Syria
  Double X
The XX Factor
Sept. 17 2014 1:26 PM Hey CBS, Rihanna Is Exactly Who I Want to See on My TV Before NFL Football Games
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
  Arts
Brow Beat
Sept. 17 2014 1:01 PM A Rare, Very Unusual Interview With Michael Jackson, Animated
  Technology
Future Tense
Sept. 17 2014 12:35 PM IOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.
  Health & Science
Bad Astronomy
Sept. 17 2014 11:18 AM A Bridge Across the Sky
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.