Should the Oracle Have a Moral Compass? Social Justice and Recent Federal Reserve Policy

Abstract

Given his popular image as the maestro of monetary policy, it is unsurprising that Federal Reserve Chairman Alan Greenspan's retirement in January 2006 provided the occasion for scholars to assess the Fed's performance during his term of office. Political conservatives led by Milton Friedman (2006) who gave generally positive reviews despite complaining about Greenspan's disdain for monetary rules, cited declines in both inflation rates and their standard deviations, and the fact that increased price stability did not come at the expense of gross domestic product (GDP). On the other hand, progressives focused on how Greenspan's policies affected social justice. One critic, E. Ray Canterbery (2006), portrayed Greenspan as a libertarian ideologue whose actions benefited wealthy financial interests at the expense of average citizens. Moreover, Thomas Palley (2005) pointed out that Greenspan's policies aided in the creation of what he called new business cycles, which are characterized by debt-fueled consumer spending, deindustrialization, chronic trade deficits, and preemptive strikes against inflation. Palley also noted that another feature of today's business cycles is a more enduring burden experienced by some groups as a result of Federal Reserve policy. In the past, most people who shouldered the costs of macroeconomic adjustment were only temporarily affected. For instance, when the Fed engineered an economic slowdown, business owners earned lower profits and their laidoff employees collected unemployment insurance while both groups felt assured that normal times would return. Today, the pain caused by Fed tightening may be permanent since decisions to curtail production or outsource work are often irreversible. Similarly, some financial contract holders may also experience lengthy dislocations as a result of Fed policy. As explained in this paper, many families will lose the homes they financed with exotic mortgages through foreclosure as a result of Federal Reserve interest rate increases.