In his press conference following the recent Federal Open Market Committee meeting, a reporter asked Federal Reserve Chairman Ben Bernanke whether he was using the committee’s aggressive policy move—promising to buy $40 billion worth of mortgage-backed bonds monthly for an unspecified time—to improve President Obama’s reelection prospects.
Chairman Bernanke might have reminded the reporter of his solid Republican credentials (I’m glad he didn’t) or pointed out that the real economy—output, employment, consumption—responds to monetary expansion much too slowly for this policy to influence the November elections. Instead, he deflected the question by asserting that Fed decisions are “apolitical” and “based entirely on the state of the economy and the needs of the economy for a policy accommodation.”1
To an extent, the chairman’s response was disingenuous in my opinion. I recall learning as an undergraduate that politics is “the authoritative allocation of value.” Politics is when somebody gains or loses something not by making a deal individually, but because some authority decides who gets what. To put QE3 into effect, the Fed’s third round of quantitative easing, it is using its legal authority to print money to push down yields on mortgage-backed bonds and thereby push down the interest rate on home mortgages, and thereby push up the market price of houses. This is an authoritative reallocation of value, i.e., a political decision.
Of course, what Bernanke meant was that this decision is nonpartisan, not apolitical. The Fed would do what it judged appropriate and let the electoral chips fall where they may. What he was defending in his response was the principle of central bank independence from Congress and the Presidency, an independence the Fed won with some serious battle scars in the early 1950s.2 Central banks from Japan to Brazil to Europe have fought similar battles with varying degrees of success, but most of us in the financial markets would list an independent central bank high among criteria for evaluating the bonds of a sovereign issuer.Whether Chairman Bernanke likes it or not, however, the Federal Reserve has become an issue in the current election campaign. That’s appropriate: The past five years have drawn the Fed into unprecedented actions, and unprecedented risks will follow from those actions.
As loyal readers will know (though not necessarily agree) I believe that Fed decisions in late 2008 and early 2009—so-call QE1—were crucial in preventing a deflationary spiral in the U.S. And I believe its subsequent easing moves—up to but not necessarily including QE3—have largely been constructive. But those actions are so far outside what the Fed has done in the past that the time is right for Congress to debate the central bank’s powers.
While I was disappointed when a presidential candidate made Bernanke himself a campaign issue, there are a few questions that I think serious lawmakers should debate: Should the Fed be able to act as bank of last resort when the financial system freezes as it did in late 2008? How closely should Congress monitor the bank’s decisions? Should its authorizing legislation restrict or even expand the kinds of securities it can hold in response to changes in the financial world? Should its ability to print money be limited more strictly?
I doubt that we’d ever replace a modern central bank with a return to the boom/bust cycles of a gold standard, but I do think the degree and scope of central bank independence should be a matter of public debate. I hope we’ll see that debate develop in a responsible manner.