Like it or not, the Federal Reserve Board is now the nation's chief agent of economic policy. Fiscal policy - government spending to create employment and tax cuts to promote consumer spending - is limited by our supersized deficits and, if we look at the impact of the last stimulus package, probably weak. When something needs to get done in the economy, the Fed needs to do it.

Wonks Anonymous does not find this to be an entirely bad thing. He has far greater confidence in Ben Bernanke to clean up the current mess than in say, G W Bush. Nevertheless he has some misgivings about the fact that our economy is currently run by a dictator - an old Roman style, democratically selected dictator but a dictator nevertheless.

So how does the Fed do it? Influence the economy that is? Long time readers of this blog will remember an earlier post on banks which described what they did with your deposits and how they used them to create additional spending power. Because they only need to hold limited reserves to meet the demands for cash banks can lend out some of their deposits to others. Through the miracle of fractional reserve banking your money can be in your bankbook and being spent by someone else at the same time.

As befits the national bank, the Fed has super powers. It can print or otherwise create money. When it wants to increase the supply of money, or when it sees a deserving investment bank that is in financial trouble, it can print money and use it to buy assets.

Most often in the past the Fed has used the newly minted money to buy US Government debt. Cash goes out, bonds go in. Banks get the cash and use it to make loans. As they make loans the interest rate goes down and business and consumers are tempted to borrow to buy new factories or wide screen televisions. This stimulates the economy of China and, because the people who work at Circuit City and Walmart still have to live here, the US economy as well.

But this power has its dangers. As Wonks Anonymous pointed out in an earlier post, if too much money is created then the value of that money declines. As the value of money drops the amount of money that we need to pay for goods increases. This is also called inflation and, in our current economy, usually starts out in basic commodities. oil and then food.

Until this happens, and it usually takes some time before the stuff hits the fan, life is sweet. This is the great temptation of the chairman of the Fed. If he is strongly attached to a president and his administration, say an old family friend and retainer, then he may want to ignore the possibility of inflation and try to stimulate the economy. This may well make up for the economic and other shortcomings of a particularly inept president and even assist in that president's re-election.

Of course, if he times it right, he will be retired by the time the consequences of his policies are felt. Right Mr Greenspan?