So Much for the Apolitical Fed

The claim that the Federal Reserve is insulated from politics has always been a farce. Greenspan did a number of ideologically inconsistent things that just happened to help Republicans. And given that the banks run the Fed, it would be impossible to say it is isolated from the politics of the MOTUs (which is increasingly the politics of Congress, anyway).

Nevertheless, when a transpartisan group threatened to require Fed audits during the Dodd-Frank debates, people on both sides of the aisle objected because it would politicize the Fed.

No such worries for the top four Republicans, I guess.

Dear Chairman Bernanke,

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.

We respectfully request that a copy of this letter be shared with each Member of the Board.


Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

Especially nice is that McConnell’s signature is first. You know, the guy who has said his single most important goal is to make Obama a one-term President?

To be fair, there are reasons to oppose QE3, which is the most likely form any Fed intervention would take. Masaccio described last year, for example, how it hurts savers. So it’s not that I’m sure QE3 would do anything but goose the stock market. But I am shocked that more people aren’t objecting to this naked political ploy.

Further, these Republicans pretend that the Fed doesn’t already have a clear mandate to do something about the economy. Mind you, the Fed has mostly forgotten itself that, in addition to “maintaining stable prices” it is supposed to achieve maximum employment. But it is part of its charter to pursue policies that will bring unemployment down from 10%.

That seems to be precisely what the Republican leadership is trying to prevent.

These boys have blatantly broken one of the rules of the Village, which is that it at least pretend that politics is not directing the Fed. Thus far, though, the Village wailers have not yet commented on it.

Update: Now that I note the coincidence, I wonder whether Lamar Alexander’s letter announcing he was stepping down from his leadership position–sent the same day as the leadership letter to Bernanke–is more than a coincidence. After all, the decision amounted to an admission that Republican partisanship was impeding actual useful policy. His letter focused on the Senate, mind you, not on inappropriate interventions in the Fed. Still, I wonder whether this was a factor?

10 replies
  1. klynn says:

    “But it is part of its charter to pursue policies that will bring unemployment down from 10%.

    That seems to be precisely what the Republican leadership is trying to prevent.”

    EW, hammer this point over and over. Over and over.

    I think I may just print a copy of the link (Fed Reserve Mandate) on a t-shirt and then add your observation from your 6th paragraph in bold.

    That is the biggest key point against the GOP and you wrote about it with clarity.

  2. William Ockham says:

    This is not just a short-term effort to undermine the economy in advance of the 2012 election. It is also a part of the larger Republican effort to undermine the ability of our institutions to function effectively. The primary tool in their long game is the willingness to violate long-standing norms of political behavior to achieve a short-term partisan goal. They have calculated (apparently correctly) that the Democrats have no willingness or capacity to counter this strategy.

    Oh, and it is a pretty clear message from the Republican congressional leadership that they have Rick Perry’s back. I was wondering if the Republican establishment was going to get behind Perry. This says they are.

  3. allan says:

    Just another case of asymmetric warfare by the American Taliban.
    The lack of pushback from the Villagers against that kind of extremist rhetoric in early 2009 helped make the TP behavior at the August 2009 health care town halls politically acceptable, and the rest is history.

  4. MadDog says:

    @William Ockham: I agree that the Repug message to their wayward colleague Bernanke is toe the Repug party line in preventing an Obama resurrection/re-election or we will destroy you.

    McConnell is being subtle in his typically not-so-subtle way.

  5. MadDog says:

    @emptywheel: I can’t mind-read Democrats enough to guarantee it, but I’d guess for the majority there is a childish tendency to never mention the possibility out loud for fear of making it come true.

  6. klynn says:

    BTW, of all the posts I have read on this subject today, I appreciate your insight, facts and observations the most.

    Thanks for a great post.

  7. Nox Ninox says:

    Kabuki is not just for Democrats anymore.

    Don’t believe for a moment that the leadership of the Party of Capital is not all for a Fed QE policy that artificially inflates it’s large donors’ hard asset values at the expense of it’s small voters’ cash deposits.

    Yet with the abject failure of QE 1 & 2 to stimulate lending, and with an unprecedented number of Fed governors in revolt of the policy, it has been clear for some months now that QE 3 would not be implemented, despite the puffery of the hedge fund traders’ and their financial media mouthpieces who profit from promoting the belief that QE 3 was coming.

    McConnell and Boehner knew full well that Bernanke wasn’t pulling the QE trigger. So they took the opportunity to pretend they opposed the policy in order to burnish their street cred (a la Rick Perry) with the Tea Party, which opposes QE 3 because it creates inflation that erodes the value of theirs and everyone else’s cash savings and because it depresses interest rates that retirees need for income.

    So the leadership preens with a meaningless political gesture to placate its base all with a wink and a nod to its donors who understand how the game is really played.

    Sound familiar?

  8. Timbo says:

    Note that Bernenkes public statements yesterday may have been a direct public response to this until now private letter. In his statements yesterday he emphasized that the Fed was to have monetary policies that sought to reduce unemployment as required under the law that governs the Fed. I wasn’t sure why he needed to reemphasize that point but this letter casts his statements in a whole new light…

  9. readerOfTeaLeaves says:

    Having read Fleckemnstein’s “Greenspan’s Bubble”, I’ really tempted to tip my hat to Bernacke. I see this as a sign of severe distress for neoclassical economics. Bernacke’s out of ammo.

    If McConnell, Boehner, et al want to get their drawers in a bunch b/c of a crisis of capital markets created by the very bullshit that they, Phil Gramm, the GOP Senate of the 1980s-90s-00s, plus Summers and Rubin created, all I can do is relish the spectacle. I love it when these guys spit into the wind ;-)

    Some oif the more outspoken, no b.s. finance guys and reporters yesterday seemed to acknowledge this is simply Beracke and the Fed starting to admit reality.

    Barry Ritholtz had a post about the end of the Bernacke Put that is well worth reading.

    Having read Fleckenstein’s book and as a follower of Yves Smith’s NC and Dylan Ratigan’s reporting, this news just made me grin — a dose of reality for a change!

    But the reality of the mess that tax havens, managerial capitalism, and mark-to-fantasy accounting created would certainly create a panic in the GOP.
    Loving it ;-)))

    And Liz Warren’s clear explanation of why no single person is ‘self-made’ was just the icing on this lovely cake.

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