Ramesh Ponnuru has it exactly right in criticizing George Will’s terrible column recently that criticized the Fed’s recent decision for more quantitative easing. He says he supports the spirit of Will’s criticism, but thinks all of his conclusions are wrong.
It’s in applying those principles that he goes astray:
Uncertainty is exacerbated by the Fed’s exercise of its vast discretion, including QE1, QE2 and, perhaps soon, QE3 (or QE5, including two “twists” also aimed at lowering borrowing costs). Bernanke, who promises more “policy accommodation” to support the economic recovery, is inadvertently vindicating Milton Friedman’s belief that “the stock of money [should] be increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs.”
Friedman adopted that view at one point in his career — admittedly, the most influential point — because he thought that the velocity of money (the rate at which it changes hands, or the inverse of the demand for money balances) was fairly stable. If velocity is stable, then stabilizing the growth of the money supply stabilizes nominal spending. (The money supply × velocity = nominal spending = the price level × economic output. Or, M*V = P*Y.) Stabilizing nominal spending is the best way for a central bank to stabilize an economy, because most labor and debt contracts are negotiated in nominal terms. By stabilizing the growth of M*V or P*Y, the bank is providing the most important form of stability it can, and letting market actors make their arrangements against that backdrop.
The economy still has lots of problems right now–many of them induced by too much government–but loose money isn’t one of them! Does the Fed run the risk of increasing inflation? Let’s hope so, because we need a little more inflation right now, at least until spending starts to recover. I think even Friedman would agree with that and would have likely encouraged more Fed asset purchases long ago.
We can’t ignore the political aspects of monetary policy – not just the economic ones. And the timing of this is problematic. Goosing the money supply might (or might not) be the right policy in a vacuum (and I supported QE2), but the timing of this is bad from the political side. I don’t just mean for those of us who prefer Romney to Obama – I mean in the sense that the fiscal authorities shouldn’t be doing much of anything right before an election since it gives them potentially too much power over the political realm. Absent a major, major problem, monetary authorities should wait until after the election. Moreover, getting involved threatens to politicize a body that will work best if it isn’t seen as getting too deeply into the fray.
But it seems to me that if Bernanke was doing this for political reasons, he would have done it much earlier, since the effect in the next 6 weeks is likely to be minimal.
Also, some have said that maybe he pushed for this after Romney said he wouldn’t re-appoint him. But, in that case, it is Romney doing the politicizing, not Bernanke.
My guess is that it isn’t politics but just Bernanke’s basically overly cautious nature that led him to wait until this point. He knows that at some point he is going to have to tighten. If the previous quantitative easing had worked, say, 8 months ago, then he might be in the position now of having to tighten, which would cause the Democrats to scream that he was being political.
In the end, I think the best way to not be political is to pay attention to economic cycles not election cycles.
What you say makes sense, though I’m still quite uneasy about the Fed making big decisions that have the potential for impacting elections (even if the real economic impacts will be felt after the elections). Moreover, this discussion we are having assumes that the Fed ought to have such discretion in the first place. While I’m not opposed to the Fed acting when the heavens are truly falling, I think the Fed should operate according to transparent rules that wouldn’t allow for such course shifts in relatively normal times.
One other thing. I’m no loyal defender of Romney but it is entirely appropriate for him to comment upon who – or what types of people – he would appoint/not appoint to the Fed. This decision ought to be one considered by voters as they choose between two or more candidates for President. Imagine if Obama said he’d like an Arthur Burns at the Fed and Romney said he’d like a John Taylor-type, wouldn’t that provide voters with useful information we ought to have in an election?
You are probably right about Bernanke’s risk aversion as his motivation. But if he did let Romney’s words influence his decision, the current President would have cause for removal (though he obviously wouldn’t and even this step would likely set a very bad precedent for a body that probably ought to be largely independent).
Grover, I agree with you, of course, that the paramount objective for the Fed is that they follow rules rather than discretion (though not rules that neuter their ability to respond to crises).
It’s amazing how many “libertarian” minded people still believe in the concepts of central banking,fiat currency and an Income Tax. There are 2 institutions in America that have contributed more to the destruction of our currency, our economy and our liberty then any other American Institutions: The Federal Reserve and the IRS. Why do liberty minded people still give credence to fiat money,central banking and tax collections to “grow” or “run” economies when they should be shouting at the top of their lungs to abolish the Fed,the IRS along with fiat paper money. All the things that libertarians abhor about government wouldn’t exist unless the Political Class in America had control over the issuing of money and credit plus an Income Tax to damper down the effects of inflation caused by the printing of too much fiat currency. The Marxist idea of how an economy should be run is inherent in the above 2 institutions. If people believe in the concept of liberty then they should work to strike from the hands of statists the tools needed to control economies and thus people. Not debate policies of institutions that should have been shut down decades ago.
What is unfortunate is how so many “libertarian-minded people” do such a great disservice to the cause of liberty with their failure to understand basic macroeconomics. Given the many legitimate threats to freedom that we face, the anti-Fed-looniness really just undermines the libertarian cause. It is a shame, really.
What kind of shame and looniness is there in facing reality. Paper money has always failed,the Federal Reserve has destroyed 98% of the purchasing power of the US Dollar,Keynesian macroeconomic central planning has never worked in the long run and bankrupts every nation that has tried it. The evidence is overwhelming for the reasons why America is bankrupt. If someone points out the shortcomings of a failed economic model that doesn’t qualify that person for the fitting out of a tinfoil hat.
If by “reality” you mean a world where people with no training in or knowledge of economics just get to make stuff up because it suits their fancy, then have fun in your reality.
I follow the logical writings of Murray Rothbard and Ludwig Von Mises. With that said I am almost 70 years old have and have run 3 successful businesses in my lifetime,the last one for almost 40 years. I’m not a tenured “economics” professor at some taxpayer funded diploma mill.who worships at the feet of a paper hanger,ex IRS employee by the name of Milton Friedman. As far as training is concerned,I bet the “economists” who ran the Soviet Union probably had their training at the London School of Economics. No wonder that system collapsed.
But your admirable success in one arena of life (running businesses) does not mean you have anything useful to say about other arenas (such as the economy). A lumberjack does not necessarily know anything about forestry.
Sven, Were on the same side. How can anyone believe in keynesian gibberish? We both want whats best for America,our children and grandchildren. America has taken the wrong economic path. You can’t continue over the abyss and when someone warns people first belittle and then shoot the messenger. We are now in a Depression not a Recession. And if we continue down this path the Depression will morph into an inflationary Depression. The FACTS are that America is finished economically. The middle class is disappearing. People are losing their homes,their life savings ,their careers.The currency is losing its purchasing power daily. This is the direct results of central planning fiat currency macroeconomics. When a nation makes a mistake it effects all its citizens. Without a doubt The Federal Reserve,the Income Tax and Central Planning were huge mistakes that changed America from the largest economic powerhouse creditor nation in the world,with a huge middle class,into the world’s largest debtor nation ever. Whether your an economics professor or an average interested citizen you’d have to be blind not to see what is happening and why it happened,despite the government propaganda and under counting of the economic figures.
Whether one has academic credentials or not, one still should make sound arguments based on solid theory and evidence. There are enormous problems we face, such as the unsustainable path we are on with respect to entitlements and political institutions that do not seem to be robust enough to correct that path. The reach and scope of government are far too broad, both in terms of hampering economic growth and in violating basic liberties.
Yet sky-is-falling ranting about things that don’t matter just hurt the libertarian cause. The purchasing power of the currency is NOT falling (it actually needs to fall more!), the middle-class is NOT disappearing, and the country is FAR from bankrupt. Indeed, we still have vast wealth and resources that continue to be produced by a (mostly) free-market economy, with the aid of monetary system that for over 70 years has done a mostly decent job of facilitating that growth (though the Fed did not respond aggressively enough to the 2008 financial system crash) .
So let’s fight the real battles that matter rather than storming castles in the sky.
Finally a columnist that gets it. Don’t let the Austrians take shots at you with their regurgitated Ron Paul bantering. It’s not even real economics anyways.
Kudos.
Libertarian Jerry, Friedman wasn’t Keynesian, so your ignorance is all to obvious.
None are so blind as those who refuse to see.