Twist and Shout: All Fed Up.

The Beatles’ fans will remember their eminently danceable hit number, “Twist and Shout”.  Well, of late, the Fed has been “twisting”, and it seems like everyone else has been shouting.  Not to add to the cacophony, but I want to discuss the shouting.

In the blue corner, House Financial Services Committee Ranking Member, Rep. Barney Frank (D – Mass.), wants to strip regional Federal Reserve presidents of their Federal Open Market Committee (FOMC) voting rights because he thinks they introduce an unwarranted tightening bias in the Fed’s interest rate-setting decisions.  It is disconcerting that Rep. Frank wants to stifle debate among the monetary decision makers just at the time when robust discussion is vital – during a troubled economic climate with no clear way out from under the dark rain clouds.  The moment only presidentially appointed and Senate-confirmed Fed officials would vote on interest rates, there will be a clear bias towards excessively loose monetary policy – with the implied threat of not being reconfirmed, or worse, impeached by the Senate.  At least Mr. Frank would be pleased.

The cynosure of Rep. Frank’s attention, Federal Reserve Chairman Ben Bernanke must feel like a piñata, or perhaps like the referee in a prize boxing fight who receives an uppercut delivered squarely to his chin.  Not to be outdone by their opponents on the left, congressional Republican leaders recently sent a, shall we say, friendly missive to the Fed head.  Polite and respectful like the letter a delinquent mortgage holder receives from her bank.  Surely, the Republican leadership must know what happens in countries that lack appropriate central bank independence?  Refer the Argentine saga of Kirchner, Cristina vs. Redrado, Martin.  The main problem with the Republican communique to Mr. Bernanke is that it conveys an implicit threat of legislative action if the Fed continues along what the GOP considers its fast and loose ways. (As Ezra Klein succinctly explains, the underlying message is “Nice central bank you got here. Shame if something should happen to it.”)  In so doing, the Republican leaders crossed the line.

For our congressional Goldilockses, the monetary porridge is either too hot or too cold.  Many of the esteemed ladies and gentlemen skipped Econ 101 in college, but that hasn’t stopped them from weighing in on complex matters like monetary policy.  They would counter that the many hundreds of Ph.D.’s at the Fed didn’t save us from the financial crisis, but the fact is neither did our 535 elected officials inhabiting Capitol Hill, who hadn’t the faintest idea.  Personally, I would still rather trust the judgment of those who teach economics courses than those who can be found at the college cafeteria during the lectures.

The GOP leadership’s letter to Mr. Bernanke isn’t even the only instance of senior Republicans stepping out of bounds on political interference in monetary policy.  Their collective communications on the Fed have been remarkably blunt, bordering on uncouth, on several occasions.  To make sure their intent is not lost on anyone, they installed Ron “End the Fed” Paul as the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology.  While there is nothing new about politicians a la Mr. Frank clamoring for lower interest rates, the Republican demand for tighter policy is curious in that it is what one might call reverse populism, though no less contrary to the principles of sound economic governance.  Despite the party’s strident opposition to looser monetary policy now, it would be interesting to see if they don’t produce innovative arguments during a future instance when a Republican president is heading into a reelection campaign against the headwinds of a weak economy.  Don’t you know that the attendant economic circumstances will of course be different then (somehow), conveniently justifying the opposite perspective?

One can understand the politicians discussing auditing the Fed’s financial exposures, given the secrecy surrounding the huge amounts of money that the Fed lent domestic and foreign financial institutions.  But politicians, please do not interfere in the central bank’s most fundamental function, that of setting interest rates for the economy!  As small mercies go, one silver lining to emerge from all the Fed-bashing is that the substantive debate around the Fed’s dual mandate has been reinvigorated.  Regardless of where one comes down on the topic, this is at least a healthy, legitimate deliberation to participate in, which is more than can be said of the current racket.


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