I continue to be amazed-appalled, really-at the lengths the Republican presidential candidates have gone to trash Ben Bernanke and the monetary policy the Fed is conducting. Ritual Ben-bashing has become a staple in all the GOP debates: Mitt Romney and Newt Gingrich have both said that if they’re elected, they’d fire him (which the president doesn’t have the power to do, by the way). Rick Perry says he thinks Bernanke should “be treated pretty ugly” by voters. And Ron Paul-well, let’s don’t get into how Ron Paul feels about Bernanke and the Fed. There aren’t many issues all the candidates seem to agree on, but the demonization of the Fed chairman appears to be one of them.
They’re all wrong. First, the politicization of central banking is never a good idea. It’s not for no reason that the Federal Reserve chairman doesn’t serve at the pleasure of the president or that the Fed is designed to be immune to the day-to-day meddling by re-election-minded politicians. Sometimes, for the sake of long-term economic stability, central bankers feel compelled to pursue policies that are unpopular with the public and elected officials. It’s a part of the job. Those policies may in the end turn out to be wrong-headed or not. But it doesn’t help matters if the central bank has to do its job while looking over its shoulder and worrying about retribution by Congress or the White House. Countries have tried that. It doesn’t work.
But more to the point, what alternative monetary policy would the Republican candidates prefer? They seem to think the Fed should ignore the fact that the economy’s weak and that businesses are operating in an environment of huge regulatory uncertainty, and that it should simply focus instead on controlling an inflation that’s already so low that nobody seems to notice it. That all sounds very prudent–except that it’s nuts. If you doubt it, look at what the European Central Bank has been up to amid the chaos in Europe. The ECB’s policies have been much closer to the sound-money, Ron-Paul-approved approach the Republican candidates seem to be pining for-which is one reason Europe is on the brink of collapse. If Bernanke weren’t being aggressively accommodative, it’s very likely GDP would be growing slower than it has been and unemployment would be higher. How would that be a good thing?
Critics of the Fed, Republican candidates included, seem to believe that the first, last, and only job of a central bank is to safeguard the currency. That’s wrong. In times of financial stress (like lately) central banks also have a duty to act as the ultimate providers of liquidity-the lenders of last resort-in order to prevent the system from coming tumbling down. Bernanke’s Fed understands that; its policies are a key reason why the economy came through the 2008 shock in relatively good shape relative to what might have happened. The ECB doesn’t, which is why Europe is staring into the abyss. The Republican candidates really ought to tone down their Fed-bashing.
What do you think? Let me know!