When I was in high school 30 years ago, I was taught that the Federal Reserve Board was supposed to be above politics. Members of the Board of Governors serve 14-year terms, which allows them to transcend at least some of the day-to-day politics. An angry President cannot threaten to fire a governor. Chosen by the President and appointed with the consent of the Senate, the FED chair serves a 4-year term and can be replaced when his term is up, but even he remains as a governor until his 14 years are up. It was naive of my economics teacher to suggest that the FED was devoid of politics, but minimizing the outside influence of partisan politics should continue to be the guiding principle.
Enter today’s Republican Party for whom everything is partisan, run-of-the-mill eccentricity just isn’t going far enough, and personalized attacks are de rigeur. First there was Rick Perry threatening FED Chair Ben Bernanke:
“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous – or treasonous in my opinion.”
Monetary policy is certainly fair game for criticism, but threats are bad for the FED’s independence. While Bernanke’s threat was somewhat cartoonish, the GOP’s Congressional leadership’s a letter to Bernanke is more veiled and perhaps worse. Perry is a candidate, a loud mouth on the national state. Mitch McConnell, John Boehner, Jon Kyl, and Eric Cantor, however, are pretty much the GOP leadership.Their words are more disturbing. When our monetary and economic policy falls prey to partisan politics, we’re on the road to a banana republic.
Robert Reich translates the letter to Bernanke:
“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitiated economic growth or reduced the unemployment rate.”
Translated: You try this, and we rake you over the coals publicly, and make the Fed into an even bigger scapegoat than we’ve already made it.
Top Republicans believe they can block all or most of Obama’s jobs bill. That leaves only the Fed as the last potential player to boost the economy. So the GOP will do what it can to stop the Fed.
After all, as Republican Senate head Mitch McConnell stated, their “number one” goal is to get Obama out of the White House. And that’s more likely to happen if the economy sucks on Election Day.
There are actual ramifications for politicizing the FED:
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose confidence in the independence of the Fed and its monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. Lending to the United States becomes a tad riskier. As a result, lenders charge us more.
The Republican letter puts Bernanke and his colleagues in a bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.
And the specific reason for trying to manipulate the FED? His name’s Obama. He’s running for re-election. It doesn’t hurt that the wackos of the right wing are against the FED. I’m listening to an NPR story about these crazies as I write this. As the story points out, FED-bashing has been around along time. But today’s GOP is taking it to an unprecedented level.
The Fed was supposed to be independent because the mobs would borrow and borrow and then ask for inflation to bail them out. They would pay back their debts with dollars worth less than those they borrowed.
It’s a bit strange that the Fed would see political pressure in a movement demanding that they keep a stable unit of account. What is better, a stable dollar or an unstable dollar?
The fourteen-year terms provide sufficient independence. The Federal Reserve Board does not need an extra layer of insulation that let’s-all-agree-not-to-talk-about-monetary-policy propriety provides.
The problem, as I wrote here, is not that the GOP leadership tried to influence the Fed, but that what they proposed is really bad monetary policy.
The GOP is going to work the process: the 2000 recount, holds, filibustering everything from court nominees to presidential appointments, using leverage in the debt authorization to achieve broader policy goals, &c. We can tut-tut their impropriety, or we can fight back.
Democratic leadership, including the president — and senate candidates from Massachusetts — should be laying out and promoting a monetary policy vision. Progressives should be aghast at President Obama’s failure to use the tools he has to influence monetary policy: failing to appoint a more progressive Fed chairman, failing to fill vacant Fed seats promptly and when Republicans had less leverage, failing to do exactly what the GOP leaders have done and articulate a stimulus vision to contradict their austerity vision.