Fed up with Bernanke
By Nicholas Wapshott
The views expressed are his own.
There is one thing every Republican candidate agrees on. Once in the White House, the first thing they’d do is fire Ben Bernanke. His crime is to follow the legal brief of the Federal Reserve to maximize jobs and keep prices stable. To this end he has been printing money to keep interest rates low to boost business confidence to invest and thereby create more American jobs. For many conservatives and libertarians, who dominate the early GOP caucuses and primaries, Bernanke’s cheap money policy has dangerously devalued the dollar’s worth.
Guaranteeing cheap money is a Keynesian way of restoring health to an economy in recession, though Keynes himself was aware that low interest rates do not automatically lead to jobs. However cheap money is, you can’t force people to invest. Or, as he put it, “You can’t push on a string.” He compared it to buying a bigger belt to gain weight. The fact that Keynes backed easy credit is enough to make the policy treacherous in the eyes of many con-libs. (They are far more tolerant of another Keynesian remedy–slashing taxes.)
Bernanke, however, owes his allegiance not to Keynes but to Milton Friedman. To encourage growth without hyper-inflation, Friedman prescribed gradually increasing the money supply. That way, prices would rise slowly and predictably. Bernanke is also an expert on the 1929 Crash and the Great Depression, catastrophes he, like Friedman, attribute to the 1920’s Fed keeping money too tight for too long. As Bernanke told Friedman on the father of monetarism’s 90th birthday, “You’re right. We did it. We’re very sorry. But, thanks to you, we won’t do it again.”
The legislation setting up the Fed in 1913 went out of its way to ensure that the Fed would be free of political interference so that monetary policy could be independent of politicians with short-term aims. It stipulated that the Fed should fund itself, depriving Congress of its traditional means of starving programs and institutions it doesn’t like. It gave Fed board members long terms, 14 years, with the chairman serving for four.
The sole means of influencing the Fed are through appointments and Fed board salaries. Bernanke’s current term ends in 2014* (see editor’s note), when he or his potential successor, nominated by the president, must be approved by the Senate. (The GOP candidates’ demand that Bernanke leave before his term ends would trigger an ugly constitutional crisis much like Franklin Roosevelt’s failed attempt in 1937 to pack the Supreme Court.) By demanding Bernanke’s head on a plate, however, the con-libs have served notice that the Fed’s days of independence are numbered and that every new appointment, like those to the Supreme Court in recent times, will trigger a pitched battle.
The politicization of the Fed and the arguments about its role and its future is perhaps the most significant change in a generation to the way politics is pursued. And it runs counter to best practice in other countries, where politically directed central banks have bowed to short term political demands rather than achieve long term national goals.
The decision by Gordon Brown in Britain to give the Bank of England – the UK’s Fed – its independence in 1997 was a breakthrough in good governance. Arguments over the foundation of the European Central Bank to run the euro divided between the French, who wanted a politically influenced bank, and the Germans, who insisted upon an independent body. The Germans won and the ECB has thus far resisted siren calls to print money to solve the euro crisis.
Those who are now demanding that the Fed bow to political pressure are playing a dangerous game. A politicized Fed would alternate between those who keep money cheap even in good times, stoking inflation, and those who would invite deeper recessions by depriving the system of enough money to provide adequate growth. Those who blithely demand “sound money” and the return of the dollar to the gold standard rarely explain the high price Americans would pay in terms of unemployment and the balance of trade. Nor do they spell out the ruinous inflation that would follow when their opponents took their turn at controlling the Fed.
The election in November already offers a fundamental choice between stimulus or austerity, between an active government or a shrinking state, in short between Keynes or Hayek. At one extreme lie Tea Party activists, angry that the federal government has bailed out too many people for too long; at the other Occupy Wall Streeters, who blame fat cats for the broken economy.
To the list of profound choices can be added whether the Fed should remain independent or take its lead from Congress. The attempt to politicize the Fed threatens to turn the Great Recession into a rerun of the Great Depression. That is what is at stake when Bernanke and the Fed are placed in the firing line.
*Editor’s note: This article originally stated that Bernanke had announced his intention to step down at the end of his current term. No such announcement has been made. The sentence above has been corrected.
Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W. W. Norton
PHOTO: Federal Reserve Chairman Ben Bernanke is pictured in front of a projection screen after delivering opening remarks at a conference on “Small Business and Entrepreneurship during an Economic Recovery” at the Federal Reserve in Washington, November 9, 2011. REUTERS/Hyungwon Kang