Is the Fed Putting Itself in Jeopardy?
Previously published on Nov 12, 2010
A divided government characterized by gridlock is said to be a good thing from a business perspective. Of course, the same is said about any kind of government intervention, until a bailout is needed. Unfortunately, Republican pledges to undermine Democratic rule and shutdown government, if their agenda is not fully embraced, are a serious threat in a time when our Country is just starting to recover from the Great Recession. Clearly, a third stimulus package cannot be expected nor can we honestly expect new spending on job creation. Consequently, the lone official able to stimulate the economy is Ben Bernanke.
Having already taken historic steps like lowering short-term interest rates to near zero and expanding its balance sheet, the Fed hopes to use an untested policy called quantitative easing. As the Federal Reserve prints money, it risks much, but not doing so leaves the economy to fend for itself. Given its weak state and a lack of government response, the risk is greater if the Fed does not act. Regrettably, the Fed has already spent the Great Recession resisting the temptation for Congress to seize control of the body independently responsible for our Country's monetary policy.
Although the Federal Reserve Bank does submit to Congressional oversight, the decisions of the Board of Governors are based on expert opinion. Congress tends to act slowly on the politics of the day, not sound, responsive policy decisions. What makes a takeover of the Fed so tempting is the fact that the Fed is essentially responsible for engineering small economic downturns when the economy appears to be growing too fast or slow in order to prevent major crises while it is also responsible for helping management crises when they do arise. It would seem the Fed has failed, but the economy would have been in a far worse state with far less opportunity for recovery, if the Fed had not existed.
Democrats, and former incumbent Republican candidates, were punished in the 2010 Midterm Election over very controversial emergency votes like TARP and the stimulus packages. Given the electorate's tendency to punish unconventional measures, as well increased foreign pressure, the Fed will likely become an even greater political target. For Ben Bernanke, quantitative easing may well make him public enemy number one very soon. How ironic he was named "Time" magazine's 2009 person of the year for stopping the Great Recession from turning into a Depression. In the long-term, the new political dynamic may eventually lead to "reforms" that turn the Fed into an entirely ineffective puppet bureaucracy of Congress, instead of an independent voice that acts on sound economic data.