Kicking the Fed

Sunday, November 21, 2010

SOMETIMES IT SEEMS as if nobody loves the Fed. At the moment, the hostility emanates mainly from Republicans, who charge that Chairman Ben S. Bernanke's plan to boost the economy through $600 billion in asset purchases will bring on inflation and currency debasement. Senior Republicans are talking seriously of amending the 1977 law that gave the Fed responsibility for maximizing employment as well as stabilizing prices.

But only 10 months ago progressive Democrats, seeking scapegoats for Republican Scott Brown's win in Massachusetts, were threatening Mr. Bernanke's appointment to another four-year term. charged that "after taking extreme measures to save the banks, Bernanke has shown no interest in helping regular folks who can't find jobs, even though ensuring 'full employment' is explicitly part of his mandate."

A lot of this is just politics, of course. Perhaps New York Times columnist Paul Krugman is right that the GOP's "real fear is not that Fed actions will be harmful, it is that they might succeed," thus boosting President Obama's reelection chances. But by that logic, Republicans would be entitled to accuse Mr. Bernanke of printing money to reward Mr. Obama for reappointing him or to appease his erstwhile critics on the left.

We prefer to deal with everyone's arguments on the merits. The fact is that the current debate over the Federal Reserve's policies is inevitable and - at least potentially - healthy.

Ever since the struggles over Alexander Hamilton's Bank of the United States, populists have feared federal control over the money supply as an instrument of corrupt collaboration between political and financial elites. Given that history, there was bound to be controversy when the Fed began its latest round of "quantitative easing" - after more than a trillion dollars' worth of previous asset purchases and lending to specific Wall Street firms.

This is true not only because of the scale of the Fed's actions but also because of their nature. To the extent that the Fed has succeeded over the past half-century, it was due to both the perception and the reality that it is independent - that it sets policies according to technocratic criteria, not the interests of this bank or that party. The more the Fed sticks to its core mission of monetary policy, the more legitimacy it retains.

Yet buying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name. And fiscal policy is an inherently political business.

As it happens, we believe that Mr. Bernanke is one of those individuals in Washington, perhaps not quite as rare as is sometimes alleged, who is motivated by a sense of duty. With regard to his latest plan to boost asset purchases, he has been candid about the risks and has patiently explained his economic reasoning to both Congress and the public. In a cogent speech to an international audience in Germany on Friday, he effectively but diplomatically rebutted those abroad who have blamed him, rather than China's policy of undervaluing its currency, for stoking currency wars among the major trading nations.

Still, the Fed is nearly unique among central banks in the developed world in having responsibility to maximize both price stability and employment. The fact that the left can attack him for not pursuing full employment aggressively enough, while the right can accuse him of pursuing it at the risk of hyperinflation, suggests that the dual mandate piles a heavy political burden on what is and should be a nonpolitical institution. A thorough debate over the pros and cons of that mandate, in Congress and elsewhere, poses no necessary threat to the Fed's independence, and may, in the long run, enhance it.

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