CQ WEEKLY
Sept. 24, 2011 – 1:18 p.m.
Political Economy: Piling On
By John Cranford, CQ Columnist
A few years ago, it was just the gadflies of the Republican Party — Rep.
Not anymore. The mainstream GOP is now gunning for the Fed big time, and both Wall Street and Main Street might want to take notice. Their very livelihoods might be on the line.
The first signs of trouble for the Fed came during the debate over what became the Dodd-Frank financial regulatory overhaul law last year. Efforts from critics in both parties to constrain the central bank’s authority were largely deflected, however. That was a bullet dodged.
Then, last fall, Republican congressional leaders issued benign complaints about the extraordinary move by Fed Chairman
But things are clearly changing. In short order, we’ve heard the GOP presidential front-runner, Gov.
It’s pretty clear from all this that if the Republicans take back the Senate and the White House in the next election, one of the first orders of business for the new Congress might very well be a rewrite of the 100-year-old law that governs the central bank.
This is all very odd — the Fed is fundamentally a conservative institution, imbued with Republican values. And its critics are more often Democrats. The Fed is a bank, after all, and many of its most senior people are bankers and mainstream economists. Yes, Bernanke is an academic, but he’s also a Republican who served as chief economic adviser to President George W. Bush.
So where did Bernanke go wrong? Nowhere, is the short answer.
These attacks on the Fed are further evidence that American politics have been upended by the rise of the tea party and the GOP’s efforts to capitalize on populist unrest over the state of the economy. The real complaint from the public at large is that the Fed has been able to work only one miracle: It saved the global financial system, but it hasn’t yet pulled the economy back onto its feet. For that, Republicans seem to think it should be neutered.
What Are They Thinking?
To ask the question a different way: What has Bernanke’s Fed done that has hurt the economy? The answer is, nothing.
And yet the top Republicans in the House and Senate last week wrote to him and urged the Fed in advance of a critical policy meeting to “resist further extraordinary intervention in the U.S. economy” unless it could promise “measurable” benefits.
In a nutshell, that’s essentially telling the Fed to revert to its hands-off posture from the 1920s. The history lesson, which Professor Bernanke, a scholar of the Depression era, would be glad to teach, is that the Fed dropped the ball big time back then. But, then, his GOP critics would say he doesn’t know what he’s talking about.
Political Economy: Piling On
Regardless of the GOP pressure, Bernanke and his colleagues on the Federal Open Market Committee voted last week to tweak the Fed’s Treasury purchase program and increase its holdings of longer-term debt, to goose longer-term rates even lower.
This step is indeed a gamble, but most monetary policy decisions involve risks. Seven of the Fed’s 10 voting decision makers judged that the greater risk is to do nothing as the economy falters. And while three of the 10 dissented, there is no hard evidence that the Fed’s move to make credit easier at a time of stagnant growth and relatively low inflation poses a serious danger to the economy.
Moreover, those who would rewrite the Fed’s dual mandate to remove its charge of maximum sustainable economic growth and limit its role to maintaining price stability might be disappointed to find that Bernanke and his colleagues would probably follow the same course they have charted for three years. Price stability means avoiding deflation at all costs — as well as battling inflation. And that means promoting growth, not accepting recession.
It’s one thing for politicians to try to tell the central bank what to do. Even more corrosive to the Fed’s authority, though, was Texas Republican Rep.
Surely no one in a position of responsibility on Capitol Hill really believes the Fed chairman would threaten harm to the economy merely to assist President Obama’s re-election effort? Or maybe some do. In that case, the Fed may soon face a serious threat to its independence. It would be truly baffling if that challenge came not from the usually antagonistic left, but from the right.