Politicizing the Fed

September 21st, 2011  |  Published in Politics

A while back, I wrote a post where I argued that the American political system was subject to a process I called “contagious delegitimation”. In short, dysfunction and lack of legitimacy in some parts of the American system of government leads other, still-functional parts of the system to take up the slack in an attempt to deal with social problems. But without an ability to take coordinated action alongside the dysfunctional parts of the system, even those agencies that can still act will be delegitimized and hamstrung as their efforts fail to have a sufficient impact. Later on, I added some additional institutional scaffolding to this argument, drawing on Matt Yglesias’s argument about the inherent instability of Presidential systems in the presence of ideologically disciplined parties.

I was specifically concerned that we were going to see a rapid politicization and delegitimation of the Federal Reserve, which has been trying to make up for the inaction of other branches of government by stimulating the economy through monetary policy. Recall that the Fed only had to take up QE2 in the first place because congress was too dysfunctional to pass another stimulus bill, which would have been a preferable way to deal with the weakness of the economy. The inability to get that stimulus was itself partly the product of congressional intransigence, which produced first-round stimulus that was too small and hence appeared not to work even though it almost certainly made the downturn less severe than it otherwise would have been.

Then there was the last meeting of the Federal Reserve’s Federal Open Market Committee. A lot of liberals were happy that Ben Bernanke outlined an ever-so-slightly looser monetary policy, by committing to low interest rates until at least 2013. What was especially notable was that Bernanke pushed this policy through over the objections of three dissenting board members–the first time there had been this much division on the board since 1992.

But as Doug Henwood has argued, purely monetary stimulus is pretty weak sauce in the absence of fiscal stimulus from congress. So now Bernanke has to keep cranking up the high-powered money gun to try to get some traction, even as he starts to lose members of his board. Of course, the dissenting views of people like Narayana Kocherlakota are quite theoretically incohrerent, as Mike Konczal has ably documented. But the mere fact that these dissenters are there, and are vocal, is a challenge to the traditional view of the Fed as a technocratic institution above the fray of the electoral cycle. It is increasingly clear that the differences on the board are differences of political line, not mere technical disputes about the best way forward.

Attacking the Fed was, for a long time, confined to the political fringes–Ron Paul on the right, William Greider on the left. But then you had Peter Diamond withdrawing from a board nomination, Rick Perry making accusations of treason and intimations of violence against Bernanke, and more besides. And now the congressional Republican leadership is directly warning the Fed not to keep trying to bring down the unemployment rate. In other words, we’re starting to see the Fed become as political as the Supreme Court.

To be clear, I don’t think that politicizing the Fed is at all a bad thing in and of itself. “Independent” central banking has always been a neoliberal construct, and one which systematically favors capital over labor. What worries me is that this is happening in the context of a broader disintegration of American political institutions, which I’m not sure anyone has a good solution to.

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