Like the Wizard of Oz, the Federal Reserve is shrouded in mystery and does its work in a big building and often operates without much transparency. Unlike the famed literary wizard, the Fed has real power over people's lives.
That's why the public is better served by knowing more about how the Fed works and how it does and doesn't do its job.
Former Fed executive and U.S. Central Federal Corporate Credit Union President Jim Kudlinski has produced an engaging and enjoyable primer on the subject that will appeal to both experts and general readers. The Tarnished Fed: Behind Closed Doors: Forty Years of Successes, Failures, Mystique and Humor is the literary equivalent of a medical diagnostic examination.
Kudlinksi contends that one of the reasons that there needs to be more transparency is because the Fed dropped the proverbial ball in the period leading up to the latest financial crisis. He is especially critical of then-New York Federal Reserve President Timothy Geithner and the staff at Fed headquarters.
"The entire mortgage-backed security mess right in his [Geithner's] backyard, better known as Wall Street, while he slumbered at his desk," Kudlinski wrote. "Geithner and his bank were the Fed's first line of defense in the subprime mess."
But a few pages later Kudlinski, who worked at the Fed in the 1970s and early 1980s,conceded that even if the Fed had discovered the problems earlier, it's not at all clear if anything would have been done in light of the nation's home buying frenzy.
He argues that "Congress and the Fed were not likely to take away from consumers their first opportunity at home ownership. It would have taken a serious problem for them to act. But unfortunately, not the catastrophe that did occur."
Talk about a perfect storm.
The author argues that the Fed's focus on its role as a regulator all too often results in it not doing enough supervision of the financial institutions under its purview.
Kudlinksi was long gone from U.S. Central (he ran it from 1981-1986) when it got into trouble by concentrating too much risk into subprime mortgages. But he has strong feelings about the regulatory failures.
"The NCUA didn't step in early enough and there were many warning signs that were ignored," he said in an interview with Credit Union Times. "And the corporate credit union executives relied too heavily on the ratings, and too many things were given high ratings."
Although Kudlinski spends considerable time critiquing the Fed-he thinks it has too many employees who don't do meaningful work and it takes too long to make decisions-a great deal of his book is a valuable primer on its structure and powers.
He doesn't spend much time on the Fed's political and policy roles during the financial crisis. Fortunately, readers interested in that can read David Wessel's masterful book, In Fed We Trust.
In writing The Tarnished Fed, Kudlinski has provided an important service by demystifying an important governmental entity.