Ruminations, September 25, 2011
The lynching of Ben Bernanke
The Federal Reserve Chairman has a tough job. As Chairman of the Fed, Ben Bernanke not only manages America’s money supply but, thanks to the Full Employment Act of 1946, he must manage it in such a way to encourage full employment – even when the goals seem to conflict with each other.
Bernanke is well prepared to handle his role. He graduated from Harvard summa cum laude with a bachelor’s degree in economics and earned his Ph.D. from the Massachusetts Institute of Technology. He was head of the Economics Department of Princeton until he left that position to serve as a member of the Board of Governors of the Federal Reserve. He was then named Chairman of President George W. Bush’s Council of Economic Advisers and shortly thereafter became Chairman of the United States Federal Reserve, a position he has held for six years.
Being well-prepared is no guarantee that all your decisions will be faultless and does not mean that you will be above criticism. His policies have been criticized by members of the Federal Open Market Committee (FOMC) — which sets monetary policy –, members of the European Community and other economists. (This is not to say that he doesn’t have supporters in these very same areas as well.) It’s a good thing that the Federal Reserve is independent. But being independent does not require one to be combative.
Not that Bernanke is combative yet, but he may need to take that stance to deal with those who are combative towards him. Consider the Republican candidates for President who have in effect picked a fight with Bernanke: Rick Perry, Mitt Romney, Newt Gingrich and Ron Paul. Maybe one can ignore these comments because they have been made, in part at least, for political gain. But it’s difficult to say how they will play out should any of these candidates be elected president while Bernanke still has time left in his term as Fed chief.
Among Bernanke’s controversial (at least in some quarters) activities are:
- Last week, he announced that the Fed would shift some $400 billion of its short-term treasuries to long-term. This will, Bernanke and others believe, spark spending and re-investment. Others are doubtful that businesses, with almost $2 trillion in cash, will take advantage of the long-term low interest rates to borrow money.
- In an effort to re-inflate the housing bubble, the Fed will invest maturing mortgage securities into new ones. The problems that this inflicts on long term prospects (like inflation) will be, one hopes, dealt with later on.
- A $600 billion quantitative easing (QE) program was initiated in 2010. QE is the process by which the Fed magically creates money from nothing and uses it to buy bonds from banks. This gives the banks extra cash from which they can, according to theory, loan to those seeking business expansions. This comes on top of an earlier $300 billion QE program. The results of both are problematical.
The Republicans are becoming increasingly the hard-money party and view Bernanke’s actions with skepticism. But now Bernanke is taking shots from Democrats as well.
Representative Barney Frank (D, MA) doesn’t like disagreement. As noted above, some members of the FOMC (to be precise, three of twelve) have been critical of Bernanke’s expanding the money supply, believing it is inflationary. Frank feels that these three dissenting votes will cause the Fed to lean too much to the inflation-fighting side and not enough on the easy-money side. Therefore, Frank wants to restructure the process of selection of Board members so everyone will in favor of easy-money.
To put things in perspective, let’s look at Frank’s contributions to the economic well-being of the country as a whole.
- Frank was the Chairman of the House Financial Services Committee (2007-2011) charged with overseeing “all components of the nation’s housing and financial services sectors.” This was just prior to and during the first years of the economic collapse.
- When President George W. Bush suggested that Fannie Mae ands Freddie Mac were in precarious situations and needed further oversight, Frank responded that he thought that Fannie and Freddie were “not facing any kind of financial crisis,” were in good shape and that he wanted to “roll the dice” on them. He was wrong on that.
- Frank is co-author of the Wall Street Reform and Consumer Protection Act. This reform act is 2,319 pages long and despite its good intentions, it leaves much of the precedent setting to government agencies and has introduced so much uncertainty to the financial sector that it is contributing to the lack of recovery that the United States is experiencing.
Just as President Franklin Delano Roosevelt was wrong to attempt to pack the Supreme Court when it failed to rule his way, Frank is wrong to attempt to pack the Federal Reserve when that packing would serve to stifle legitimate debate.
And it is wrong for a potential future president to criticize the independent Federal Reserve Chairman in personal terms – especially when the president’s term overlaps with the Fed Chairman’s (a new president would take office in 2013 and Bernanke’s term won’t end until 2014).
The interesting thing is that Bernanke’s policies may be wrong, too. But he is the Fed Chair and he tolerates dissent and is responsible for the execution of the Fed’s policies. And he deserves better treatment from his opponents.
Quote without comment
Federal Reserve Chairman Ben Bernanke, during a speech at the National Economists Club, Washington, D.C., November 21, 2002: “Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency.”