I would think that some would argue that the Fed did step in and do what it thought was a strong plan by cutting a deal to curb government spending in exchange for credit controls. The intentional loopholes were exactly where they went wrong. The general public doesn’t see those loopholes. They only read the headlines that says they shouldn’t or can’t use their credit cards and react to that. So, they should have had a strong plan, not one based on deception.

Its almost impossible for the Fed to effect, much less control, government spending. They have no direct ability and any words by Greenspan fall on the very deaf ears of elected officials. They have much more control over interest rates, although not complete, direct control. More on this in the coming week.

If you look back at how the Fed changed the target rate, you will find lots of very small changes. They usually move much slower than many would like. They don’t want to destabilize the system by encouraging everyone to move at once. If you view rate cuts as the gas and rate hikes as the brakes, how would you like to be driven around? Stomping on the brakes and gas is rough ride and slow steady pressure is a much smoother ride. Corny analogy but you get the point.

There is the difference comparing now to then. Volker made some drastic cuts and hikes to try to control the situation quickly. Greenspan moves like a turtle for the most part. Also, he never says anything that can be understood by the press or mainstream america. This makes it difficult for the masses to overreact to anything the Fed does like they did when Volker tightened credit controls. Some call it “Greenspan Speak.” You can’t react to what you don’t understand.

The option of do nothing really wasn’t an option once Volker was attending cabinet meetings and cutting budget deals. There was no need for Fed action on Credit controls, they just gummed up the works with a bunch of paper. So the “do nothing” should have started before they “did” get involved with the Administration. The lesson is clearly that the Fed and Administration are two separate entities that should remain insular institutions.