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Bernanke Reveals the Reality of the Fed’s Triple Mandate

Ben Bernanke gave his first public speech in an appearance in Abu Dhabi and boy was he unusually candid.  I found one comment to be particularly interesting.  He says he would have liked to do more for the average person, but that there’s a harsh reality about how the Fed can actually help the real economy:

“My natural inclinations, even if it weren’t for the legal mandate, would be to try to help the average person.”

“The complexity though arises because in order to help the average person, you have to do things — very distasteful things — like try to prevent some large financial companies from collapsing.”

This is a reference to what I’ve referred to as the Fed’s triple mandate (see here).  Once you understand how the Fed is designed, it becomes clear that the Fed is really just a big clearinghouse.  It is basically a bank for banks.  And the way that bank helps the real economy is primarily by making sure that all the real banks, which it services, are operating smoothly.  After all, if the banking system doesn’t work then the Fed doesn’t really work.  So the Fed’s real mandates work like this:

  1. Maintain an orderly and stable banking system.
  2. Maintain price stability.
  3. Maximum employment.

Maximum employment is last because we’ve all been tricked by economists that remotely high inflation is worse than having millions of unemployed people.   But what all of the economists seem to have missed is the fact that the Fed doesn’t even really have a dual mandate because the dual mandate is useless if the Fed doesn’t hit its first mandate  of maintaining an orderly and stable banking system.  In other words, if we were to rank who the Fed serves it would look something like this:

  1. The banking system.
  2. Economists who are convinced every business cycle is a repeat of the 70’s.
  3. The average joe.

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