According to Ivan, there’s nothing new about our banker-in-chief being the partisan tool of our commander-in-chief:
But whatever Bernanke’s own personal motivations may be, free from or encumbered by political inclinations, the transformation of the Fed since the late 1970’s makes any genuine encapsulation from the gravitational draw of partisanship impossible. Originally created with the singular mission of price stability, or the preservation of the dollar’s value, Congress amended the Fed’s mission in 1977 to encompass a dual mandate: they are now charged to “promote effectively the goals of maximum employment”. Let’s leave aside the problem that these two goals potentially conflict with each other, the tools for securing one ineffective in the service of the other. The more pressing problem is that the dual mandate added fiscal policy to the Fed’s jurisdiction over monetary policy, charging it with goals that are necessarily political in character. Also, the addition of employment to its purview planted the now sprouting seeds of mission creep: in 2007, Frederic Mishkin, then Governor on the Fed’s Board, claimed a shockingly aggrandized scope for the agency, tasked with the “ultimate purpose of fostering economic prosperity and social welfare”. This is a far cry from a narrowly defined purpose, designed so amorphously it would predictably, even necessarily expand over time.
The Fed’s clumsy incursion into the market will forestall real legislatively directed economic reform, kicking the can of responsibility yet further down a dark road, that leads to pulverizing debt and long term economic languor. We know what this place looks like; it looks like Greece. Whatever rabbit Bernanke can still yank from his hat of monetary tricks is illusory–the best QE3 can achieve is the mirage of “wealth effects”, the artificial high that is closer to momentary intoxication than to stable contentment. Another tranche of easy money will only mimic economic growth, the cheap and ephemeral satisfaction of drug induced hallucination, not create it. Real wealth will only result from sound fiscal, not monetary policy: the lowering of marginal tax rates, the elimination of unwieldy regulation, and the trimming of a corpulent government bureaucracy.
Whatever Bernanke’s motivations may be, the essential problem is that the question of his objectivity must be raised at all, and it must, because the Fed is no longer a non-political entity, though it still enjoys protection from the accountability any political agency should bear. Whether he likes it or not, Bernanke just pledged what will likely amount to a trillion dollars of taxpayer money to Obama’s reelection, thereby impacting not only the economy, but potentially immigration policy, the next Supreme Court nominee, education, and even more urgent determinations, like questions of war and peace. In exchange for powers so consequential, he should have to answer to Congressional oversight, to the consent of the people. Or better yet, he should stick to monetary policy.
So Romney, of course, should try, following our Jim’s lead, to call out the president on this unaccountable stimulus package for his reelection.
Obama, of course, will resent loudly the impugning of his and Bernake’s motives. He’s really good at that. Romney’s the partisan, not me! I’m the president and I have a job to do.
Then the savvy will add that that’s what incumbents do. It’s just good politics. If there’s a problem, it’s with the system, not with this president.
September 24th, 2012 | 4:43 pm
It is nice to hear from the Ivan the K, and from Mr. Lewis, too, who has the effrontery to know something about economics. I agree with the K entirely about the “new” role of the Fed, which does enmesh it more and more into politics. It is a huge issue, as he points out, whether such power should be given to a central bank on the terms we now do.
I like to think of economic questions, so far as possible, in terms that make sense to the ordinary person who is acting. The Fed today–Mr. Lewis may correct me–seems to me to be having a huge impact on the decisions of many people. It impacts them at the margins of their behavior more than tax rates and many other government policies. (And because such policies are made by a Bank, and not–directly– by political actors like the Congress or President, most people do not consider these policies to be political or under their influence or control….) I talk to many people today in my age cohort who have retired or are thinking of retiring. The main issue for them is the impossibility of securing any kind of return on fixed or safe savings… The interest rates are under one percent. Fed policy, as I understand it, is very much responsible for these rates, though there are other considerations as well.
So what is the impact of these government-induced low interest rates? Here is what I see. Sometimes people working put off retirements for fear that there current saving will not give them the income they expected. Others jump and leap, thinking that since they cannot get any interest return on fixed savings, they should go into equities. The consequence is that they over-invest–massively–in equities. In turn, the price of equities is bid up over its “real” or natural price. By this logic, if this is correct, our government is involved in encouraging massive speculation. It is creating a bubble. If the government–deliberately and consciously– promoting reckless speculation, it is one of the most disturbing facts I can imagine. Governments, if they do anything in this domain, ought to promoting prudent behavior and sound economic “morality.” It is doing just the opposite.
But leave all this analysis aside. More disturbing than this policy–on which I know views can differ– is the fact that the current Fed chair has implemented measures squarely in the middle of a political campaign. This is “political” in an even more direct sense than Ivan has explained; it is action meant to influence the outcome of an election. To use Ivan’s terms, the Fed is administering the drug just at the point where (it hopes) some people will “feel good” for the election. After all, the market is going up..This is what I called the socialization of mass speculation.
September 24th, 2012 | 5:57 pm
Interesting article with which I disagree.
“If there is a problem it is with the system and not with the president.” (I will agree with this).
I agree with that and find it interesting that Ivan is at least willing to go back to 1977 and the change in the federal reserve charter. It would be even better if he was willing to go back to 1971, which was a more important year… or to go back to 1945…or perhaps just as importantly to the Treaty of Versailles and John Maynard Keynes diplomacy and geo-political economy arguments. (None of which would be terribly relevant for QE-3)…but none of which are immaterial if one is going to bring up material differences between Europe and the United States.
In my opinion howhever Ivan K’s point is a key component of “american exceptionalism”, after all a key difference, among many between ourselves and the greeks is that the federal reserve has a dual mandate and the ECB only has a mandate to protect the Euro. So the legal structure itself “nudges” towards a partisan(unexamined/unchallenged) answer in terms of ideal policy, in the case of Europe in favor of the Germans and tight money and against the Greeks and a desire to seek fuller employment, and political autonomy. If the ECB was the federal reserve and the Euro was the dollar…But then why not: If Brittish Exceptionalism/Keynes had won, over american exceptionalism and we had bancor? (or French Greed and the military industrial complex had not conspired to end Bretton Woods)
I completly agree with Ivan that there is every reason to believe that QE-3 will have a limited impact. (In part because of the way the program works in a rather redundant way, given the alienability of excess reserves in a system in which the fed sets the feds funds rate.) Its proper characterization does seem to be monetary policy, thus explaining in part its immateriality. Expansion in the Fed ballance sheet actually has very little impact upon the economy. So I also disagree with Ivan that “The only unambiguously quantifiable results have been staggering debt, creeping inflation, and an increasingly hobbled dollar.”
In actuality the only unambiguosly quantifiable results has been the ability of the federal reserve to target an interest rate range that would otherwise be “impossible”, and to do so in such a way that minimizes the amount of interest collected by the fed (which would be contractionary). Instead such minute amounts (on ridiculously huge sums, for periods of minutes, hours, days) of interest as would be collected by the fed are instead collected by banks who have the ability to compete for lending to each other, thus making it somewhat possible for the interest rate to fall below the limits set by the Fed. But please note that these excess reserves are not otherwise alienable.
The program is a sucess, but its analytic capacity to produce what the rhetoric may suggest it should is severely off in part because rhetoric has its own analytic. What the Fed is actually doing and able to do is interesting in its own right, but has very little to do with the way it is rhetorically sold (used for partisan, or expectation manipulation purposes). It isn’t an A for Effort and an A+ for blind faith. It is just an A for Effort, and a shake your head and laugh, at the ways in which the Effort is “spun” or Hellenized. So the blind faith component, or the expectations/rhetoric game is in actuality not policy or mechanics under the control of Ben Bernake. Rather in an effort to calibrate his non-partisanship Bernake has restrained himself from giving a full throated/red meat Keynesian endorsement for actual stimulus, i.e. government spending, (which would have lent support to the democrats, or at least would have boo’ed the hell out of the deficit hawks) and has instead done what he can as an american, i.e. been proactive in inventing new “tech”/policy..
This new tech is interesting… still Keynesians don’t think it is the right policy, but it is the policy of someone concerned with neutrality, rather than the overt statesmanship(and necessary partisanship) of a Keynes, or even a Krugman, who probably would have just told congress outright that they should put foward a second stimulus bill that would be less convoluted.
The main thing that is Greek about all of this is Ivan’s use of adjectives and thus Rhetoric(pace Aristotle) in place of quantification. i.e. “staggering”, “creeping”, “hobbled”. If you are really worried about looking like Greece, what you must eliminate is rhetoric and the hellenic contribution to western civilization, i.e. something like Karl Popper’s attack on Plato in the Open Society and its enemies, directed at the entirety of the Hellenic contribution to western civilization… (This is way too far, and lacking a mechanic, is itself a materialist impossibility, a derivative in copyright alone, i.e. Marx’s freedom from)
Also note that a huge federal reserve ballance sheet is not at all inflationary in the long run, even if the money the banks were getting wasn’t trapped as excess reserves.
Assuming for example that the world has a limited supply of sheet metal, it would be theoretically possible(not taking into account production capacity) to spend $500 trillion buying up Toyota’s from Japan.
So if the Federal reserve had something rediculous like $500 trillion dollars worth of Toyota’s on its ballance sheet and Toyota/Japan had $500 trillion, it would be inflationary in the short run(in large part because the question is directly related to production capacity)…. but lets just think of these Toyota’s as representing a certain finite quantity of sheet metal. At some point the fed could unwind its Sheet metal, by recycling the Toyota’s, and perhaps getting more in dollars on a unit level (due to inflation, but I said long run…) for the recycle/material value, than it paid for the engineering, assembly, branding and multiple component toyota.
If the assets are real assets then inflation of assets denominated in dollars is also deflation reconverted to dollars.
In other words if hyper-inflation ever does happen, it would be theoretically possible for your import to be worth more for its recycle cost than you paid for it.
I wouldn’t hold your breath for becoming a junk yard millionaire on commodity hyperinflation dreams. But in the long run if the fed policy is inflationary, the assets held on the fed ballance sheet risk appreciation. So unwinding this trade would be deflationary, because it would pull dollars back out.
In the short run QE-3 has a very very mitigated effect, that is only weakly inflationary by virtue of decreasing the remitance paid to the congress, in part because the banks who get this money as excess reserves are only able to spend it mimicking the function of the Fed itself in setting the overnight rate. So the Fed makes less profit on very large numbers, albeit at a very low interest rates, and instead this accounting profit goes to the banks. This is money the Fed would otherwise drain from the economy, and ship to congress to be “destroyed” (or applied against the budget deficit).
So the bottom line is that you have the rhetoric down pat, complete to the misnomer of Hellicopter Ben Bernake. But you don’t actually have the Hellicopter enabled…So all you have is Greek!
September 24th, 2012 | 10:20 pm
Hey there JC
Your comment is closer to the spirit of what I mean that Pete’s new, higher grade post. Yes, there are legitimate intellectual roots and sources, even conservatives ones, that would explain the turn to quantitative easing, etc. These are complex issues and I’m not an economist, even an amateurish one. What little comprehension I have points to this being an unwise redux of previously failed strategies but there are a lot of folks with a lot of economic wisdom who would likely argue otherwise. My point is that there are some institutions in American government we have intentionally immunized from political accountability precisely because it has been determined that (1) the decisions they make are essentially non-political in character (2) these decisions will be corrupted if political pressures are introduced (3) they can, in fact, be effectively insulated from politicization and (4) the consequences of these determinations are themselves essentially a-political. This insulation largely amounts to freedom from congressional oversight or a direct line of accountability that leads back to political representation. Something like these conditions are outlined by Hamilton in Fed papers 78-83 with respect to the judiciary. My central point, irrespective of the intellectual genealogy of Bernanke’s monetary policy, is that none of these conditions seem to properly maintain for the Fed (if they ever did). If that’s the case, then a powerful argument could be advanced for some sort of congressional oversight or a radical retooling of the Fed’s mission. There is the mission creep of any government bureaucracy, but a peculiarly pernicious variety issues from an agency charged with such an esoteric purpose: Jim, Pete, and Lawler are three pretty smart dudes who claim general ignorance, with a minimum of Socratic irony, regarding these affairs. This paves the way for something beyond a freedom from institutional checks and balances, which is itself worrisome. It prepares for a sense of technocratic superiority that almost necessarily becomes contemptuous of public opinion. And the Fed, on this score, is a tougher problem than the judiciary: for all the highfalutin constitutional hermeneutics that resists reasonable public access to juridical debate, there is still, as Madison liked to observe, a relatively plain common sense interpretation of con text that has a legitimate claim on the truth. It’s harder to see what a plain, common sense monetary policy is, at least in a comparable sense.
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