'Money for Nothing,' But Not for Free

The Federal Reserve's flaws are on full display in a new documentary.

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News headlines have been full of the Federal Reserve and the market's reaction to it, but now the 100-year-old institution has made it onto the big screen. The recently released documentary, "Money for Nothing," far from a tin-foil hat critique, approaches the Fed's flaws with a refreshing clarity, humor, even-handedness and level-headedness.

The film features interviews with many of the Fed's past and present stars, including former Chairman Paul Volcker, current Vice-Chairman and former San Francisco Fed President Janet Yellen, and five other past and present Federal Reserve Bank presidents. But it's safe to say that neither Chairman Bernanke nor his soon-to-be-named successor will be sporting one of the "Money for Nothing" T-shirts that went to many of the film's more than 700 crowdfunding backers.

"Money for Nothing" chronicles the Fed from its birth at a meeting of banking elite on Jekyll Island to its current status as issuer of the world's reserve currency and contributor to asset bubbles. It traces the evolution of the dollar from a currency backed by something tangible to one backed only by the confidence that we place in the Fed itself. In the process, it calls that confidence into question.

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The beginning of the Fed's new century will be heavily influenced by the identity of the new Fed chairman. As the film tells it, the Fed chairman's desire to be liked can be a bigger driving factor in monetary policy decisions than the economic considerations we like to think determine the central bank's actions. The allure of love from Wall Street or the White House can cloud judgment.

Contrary to musings of commentators in the 1990s, former Federal Reserve Chairman Alan Greenspan was not a deity, and all Fed chairmen are human just like the rest of us. It is this humanity that can lead to the abandonment of policies that inflict short-term pain in order to achieve long-term gain. Crafting sound policies and adhering to them can be very difficult.

The documentary shows that the necessary resolve to make those tough decisions has been a rare commodity in Fed history. Volcker, who was willing to tolerate 20 percent interest rates, is the outlier in this history. But often, the people charged with pulling the Fed's levers on the economy pull the wrong levers for the wrong reasons.

The answer is not simply finding a Fed chairman who is more responsive to economic data than his likeability on Wall Street or in D.C. Even such a thick-skinned, data-driven chairman will find it hard to obtain and process the information necessary to distinguish dangerous bubbles from healthy economic growth. Moreover, the film's historical narrative shows that as soon as the Fed starts thinking it has the lever-pulling down to a science, it learns the hard way that managing the economy through interest rate manipulation is a lot tougher than it looks. The crisis of 2007-2009 was one of those learning periods.

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In each instance, the Fed's response, as the documentary illustrates, tends to be to further expand its role in the economy. It crafts emergency bailout programs to prop up financial institutions that would otherwise have died. The Fed does whatever it can to make sure that the chickens of its poor monetary policy don't come home to roost. That was true in the case of Long Term Capital Management and, in spades, during the more recent crisis.

Fears of market reactions drive the Fed to further distort markets. It uses its powers to shove problems under the rug, only to see them rise in a much more dangerous way later. This prompts even larger Fed responses, and the cycle continues.

The movie illustrates the pressure even for Fed chairmen steeped in free market principles to put those principles aside when it comes to monetary policy. They are as firmly convinced that the Fed is the best price setter when it comes to money as they are that the market is the best price setter when it comes to everything else. They argue that government regulation is inferior to market discipline, but that the Fed can master monetary policy with a precision and efficacy that the markets could never match.

One comes away from "Money for Nothing" with a disquieting sense that we have been seduced by the misconception that a set of highly skilled financial engineers can manage the complexities that are money, interest, unemployment and inflation. Worse, their errors have jeopardized the nation's current and future economic vitality. Unfortunately, none of the smart experts whom the movie features knows how to get us out of this mess, a mess that has been mislabeled and sold as "capitalism" to the American public.

Hester Peirce is a senior research fellow at the Mercatus Center at George Mason University. Robert Greene is a research associate at the Mercatus Center.

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