In the 1920s, in the wee small hours of the mornings, employees at the Federal Reserve Bank of Dallas sang while they worked. One, Jack Culpepper, went into vaudeville, where he teamed up with a dance partner named Ginger. They married and performed as “Ginger and Pepper.” But show-business marriages are perishable, so Ginger Rogers found another dance partner, Fred Astaire.
Richard Fisher, president of the Dallas Fed, who calls the legendary dance team “Fed and Ginger,” defends the Fed as an institution as vigorously as he questions its current policy. He prefers policies more suited to the Fed as it was before it acquired the burden — and temptation — of the dual mandate. Hence his praise for legislation by another Texan, Republican Rep. Kevin Brady.
Before the Fed was created 99 years ago, the U.S. economy was in recession 48 percent of the time; since 1913, it has been in recession only about 20 percent of the time. The Fed has done much good. It cannot, however, do every good thing, although Congress now seems to think it should.
In July, Fed Chairman Ben Bernanke testified to the Senate, where one of Fisher’s Harvard classmates, the ineffable Chuck Schumer (D-N.Y.), clearly hoping the Fed would give the economy a pre-election boost, exhorted Bernanke: “The Fed is the only game in town.” Good grief.
Is Congress a spectator at the game of governance? Does it have anything to do with tax rates, spending levels and health care and other policies that have U.S. businesses, in Fisher’s words, “inundated with regulatory overload”? Expecting — no, mandating — the Fed to perform the irreducibly political task of managing economic policy means off-loading legislative responsibilities. And this inevitably involves what James Bullard, Fisher’s counterpart at the Federal Reserve Bank of St. Louis, calls the “creeping politicization” of the Fed, a worry Fisher shares.
For the first 64 years of its existence, the Fed’s mandate was price stability — preserving the currency as a store of value by tightly controlling inflation. But in 1977, Congress stipulated maximizing employment as the Fed’s second mandate. Fisher thinks “a single mandate would serve our country best.” Brady’s Sound Dollar Act, which has 48 House sponsors, would restore the single mandate and make other changes Fisher favors. For example:
Fisher began his career with Brown Brothers Harriman, the private bank, and later was notably successful as founder and manager of several fund-management firms. He knows whereof he speaks when he speaks of capitalism. And of New York, which he enjoys calling “flyover country” with the New York Times as its “local newspaper.” He says the Fed, through its regional banks, was “designed for us to be Main Street’s voice.” Brady agrees that today’s membership on the policymaking Federal Open Market Committee — seven members of the Reserve Board, the president of the New York Fed, and rotating four of the presidents of the regional banks — gives excessive weight to New York and Washington. The Sound Dollar Act would give permanent FOMC voting rights to all 12 of the Fed bank presidents.
Two months after Schumer’s exhortation, the Fed announced a “highly accommodative stance of monetary policy,” meaning expanding the money supply by buying $40 billion of bonds every month for an undetermined number of years, lasting “for a considerable time after the economic recovery strengthens.” Bernanke was appointed by President George W. Bush; his second term expires Jan. 31, 2014, in what could be the second year of a third presidency. And the policy he has announced may continue when he departs.
“This is a ‘Main Street’ policy,” Bernanke says, about “trying to get jobs going.” The theory is that expanding the money supply will further drive down interest rates, which somehow will prompt hiring and investing. Fisher is skeptical and fears that such government fidgets might exacerbate today’s paralyzing uncertainties. The United States, he says, has the world’s “most muscular business community,” but capital is “on the sidelines” — $1.4 trillion in excess bank reserves, $2 trillion on the books of S&P 500 companies — because businesses “do not know what their cost structure is going to be.”
Thanks to prior “highly accommodative” policies, the economy’s “gas tank is full, if not more,” but it is unclear “who is going to step on the accelerator.” Perhaps no one will, as long as the Fed is regarded as “the only game in town.”