Why Alan Greenspan should show you his hand.

• Author: Greider, William
• Position: Federal Reserve System's secretive practices - Cover Story

The Federal Reserve System is the most powerful financial institution in the country. But its decisions are made in secret, and the Fed resists sharing the record of its deliberations with the government's other major economic players: the president and Congress.

Rep. Henry Gonzalez, the Texas Democrat, is proposing reforms to ensure that all senior Fed officials are presidentially appointed and congressionally approved--some Fed officers are now chosen by bankers--and that records of Fed decision-making be made public. These are reforms without friends in high places: President Clinton concurs with the conventional wisdom, saying there "is a general feeling that the system is functioning well and does not need an overhaul just now." In the following pages, the Monthly explains why Clinton is wrong.

The Federal Reserve and its conduct of monetary policy involve daunting complexities, but the most important thing to understand is really quite simple: The Federal Reserve is a political institution.

That is not how the Fed is generally perceived or depicted. By tradition and design, the conventional wisdom describes our central bank as a kind of cloistered sanctuary where disinterested experts make authoritative calculations about the future of the economy. The Fed's governors are said to be "above" politics--protected from the messy claims of special interests that surround Congress and the president. The extraordinary secrecy surrounding the Fed's decision-making supposedly insures that crass political motives will not intrude on its difficult deliberations.

The veil of secrecy certainly does enhance the mystique surrounding the Fed--and the general ignorance about it. Otherwise confident and intelligent people, including members of Congress, defer to the Fed's wisdom mainly because they do not understand it. They are understandably intimidated by its mystery and power.

What I found behind the veil, in the years of research that produced my 1987 book on the Fed, Secrets of the Temple, is an agency of mortal men and women--smart, dedicated, and exceptionally well-educated people who are empowered to decide some of the largest questions of how the federal government manages the economy. In my many interviews, the one theme that Fed governors, Federal Reserve Bank presidents, and other senior officials repeatedly emphasized was their own fallibility. Monetary policy is filled with large uncertainties, squishy facts, and unpleasant trade-offs between competing goals. The Fed deliberates at length, but it must also decide things on the run, since neither financial markets nor the broader economy of commerce will wait for its judgments.

And, as every Fed governor freely acknowledged to me, the Fed also makes mistakes--just like the rest of us mortals. The difference is that the Fed's mistakes can have devastating impact on the lives and fortunes of millions. It can sink viable business enterprises, force debtors to the wall, and put millions of people out of jobs. It can reward some investors and punish others. It can literally reverse the tide of economic growth or, in other circumstances, ignite the economic energies of the nation, not to mention the world.

Given these vast powers, it is fatuous to pretend that the Federal Reserve can somehow be insulated from politics. And, indeed, it is not. As any candid Fed govemor will tell you, the institution is bombarded constantly with pleas and demands and unsolicited advice from select interests. As a matter of style, lobbying the Fed is done more delicately and discreetly than, say, lobbying Congress or the White House, but the private and semi-private dialogues surrounding monetary policy go on continuously--between the Fed and financial markets, banks and brokerages, and other major players, both foreign and domestic.

The only players who are left out of this conversation are the American people--and, to a large extent, their elected representatives. Instead, they are provided a frustrating stream of evasive euphemisms, opaque jargon, platitudinous generalities, and, sometimes, even downright deception. As more than one Federal Reserve governor confided to me, it would be very difficult--perhaps impossible--for the Fed to have an honest discussion of monetary policy with Congress or the public because the level of ignorance (and the potential for misunderstanding) is so profound.

So, if Congress is serious about reforming the Federal Reserve, it will necessarily have to think about changing more than the institutional behavior of the Fed. The lack of accountability is not simply a function of Fed mystique. Among elected politicians, there is also a widespread willingness not to know or understand. In fairness to Congress, the news media encourage this deference by promoting the conventional wisdom about the institution. Any politician who dares to become a critic can count upon damaging attacks from both editorial writers and news reporters, accusing him or her of "political meddling" with the non-political Federal Reserve.

I want to be very clear about what I mean by "political institution." I am not arguing that the Federal Reserve plays partisan favorites at election time or that it secretly obeys the incumbent president's...