Former Fed chair Paul Volcker recently sounded off against the current Fed for toeing the edge of its authority, exercising powers that are, in Volcker’s words, “neither natural nor comfortable for a central bank.” It’s the first time I recall a former Fed chief criticizing his successor. Justified?

Think of it this way. You probably learned in school the United States government has three branches. Actually there’s a fourth, in some ways more powerful than the other three. It’s called the Fed, and it pretty much runs the American economy. Yes, Congress and the executive occasionally pass laws like the little stimulus package that’s about to send you a few hundred dollars, and appropriate taxpayer money for other purposes.

But the Fed can expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did recently when it allowed Wall Street’s major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury. And the Fed can do amazing things – like decide one big bank, JP Morgan, is going to take over another, Bear Stearns, backed by $29 billion of taxpayer money.

Even its ongoing decisions about interest rates affect us more than anything the other branches do. The Fed has decided the threat of recession is bigger than inflation so it’s been lowering interest rates. This has made the dollar drop further and faster than otherwise, which means you’re paying more for gas and food. Can you imagine if Congress caused this to happen?

Five years ago the Fed decided to make money so cheap lenders shoved it out the door to anyone capable of standing up, and Alan Greenspan pooh-poohed the idea that regulators should be especially vigilant. What happened? We had a housing bubble, millions of Americans are losing their homes, tens of millions are watching their major asset (their home) drop in value and their pensions shrink.

So does this mean the Fed should be more accountable? Are its decisions so important that citizens have a right to more say in what it does? Problem is, most people don’t understand what it does, and have no idea how it makes decisions. And partisan politics could do terrible damage. Yet we don’t want the Fed to refrain from doing what it’s doing. Paul Volcker to the contrary notwithstanding, government has to make sure there aren’t runs on our banks and that our financial system is strong.

The first step in reconciling democracy with the Fed is for people to become better educated about it. Most Americans don’t even know where the Fed is located. (It’s on 20th Street and Constitution Avenue in Washington.) And most have no idea who runs it. (Besides the chair, now Ben Bernanke, are openings for six other members of the board of governors, each appointed for fourteen years. Five regional bank presidents join them on the Open Market Committee. Who appoints the regional bank presidents?
If you don’t know, you ought to find out.) These twelve people have more power over your daily life than your congressman and Senator, maybe even your president.