September 30, 2013

'Money for Nothing,' But Not for Free

Hester Peirce

Former Senior Research Fellow

Robert Greene

Luce Scholar, FinTech, Henry Luce Foundation
Summary

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.

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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.

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.

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