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End the GOP Attacks on the Fed
Republicans rip Bernanke, but what would Uncle Miltie do?

Federal Reserve chairman Ben Bernanke

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James Pethokoukis

Senator Bob Corker, a wealthy businessman, is one of the savviest Republicans on all things financial. Before passage of the Dodd-Frank banking-reform law, the Tennessee Republican worked with Democrats, albeit unsuccessfully, to fashion a bipartisan bill. So considering Corker’s obviously high financial IQ, one would be forgiven for thinking that his bombastic questioning of Ben Bernanke last week was a rhetorical ploy or ruse. Within just a couple of minutes at a Senate Banking Committee hearing, Corker accused the Federal Reserve chairman of stimulating a “currency war,” creating a “faux wealth effect,” monetizing the federal debt, and being the central bank’s “biggest dove” since World War II.

What was that all about? A generous interpretation: Perhaps Corker employed wild misrepresentation in order to lob some softballs that the Federal Reserve chairman could easily knock out of the park. Perhaps Corker was a wily co-conspirator in the drama, playing the role of fierce but uninformed critic of the Fed only to give his man Bernanke an easily crushable foil. Some senatorial strategery!

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Bernanke effortlessly deflected Corker’s zingers. He pointed out, for instance, that inflation has been lower during his tenure than in that of any other postwar Fed boss (actually since the early 1930s). But Bernanke’s responses were of secondary importance once it became clear that Corker’s critique was genuine. Which isn’t surprising, really. Republicans are locked in a collective Jedi mind meld when it comes to the Bernanke Fed. They see its bond-buying, or quantitative-easing, strategy as a reckless monetary experiment that risks dangerous asset bubbles and rising inflation for little benefit. In response, they are pushing legislation that would narrow the Fed’s dual mandate, which is to promote both maximum employment and stable prices; GOP critics contend that the Fed should instead focus primarily on keeping prices stable.

And they are making this argument while inflation is at less than 2 percent, growth at less than 2 percent, and unemployment at nearly 8 percent. Really? Maybe Republican policymakers have spent too much time listening to inflationista gold-fund hawkers and reading anonymous Zero Hedge posts rather than, say, brushing up on the writings of Milton Friedman. Right-of-center policymakers have forgotten the full scope of the Nobel laureate’s economic legacy. Yes, Friedman was a fierce and eloquent advocate of economic freedom. But Friedman was also one of the world’s greatest scholars of monetary policy, whose magisterial A Monetary History of the United States, 1867–1960, co-authored with Anna Schwartz, pinned the Great Depression on the failings of the Fed.

If Friedman had the same intellectual standing with Republicans today as Austrian economist Friedrich Hayek does, the GOP might at least be aware of the possibility that (1) it was a tightening of monetary policy in 2008 that exploded a modest downturn into the Great Recession, (2) today’s low interest rates signal tight money, not loose, and (3) bond buying is exactly the right policy when interest rates are near zero, inflation quiescent, and the economy moribund.

Friedman knew that while inflation is everywhere and always a monetary phenomenon, it isn’t everywhere and always a big problem. The year 2013 is not 1980. Instead of badgering Bernanke about inflation, Corker should have hammered him for his historically awful unemployment record, for letting nominal GDP collapse in 2008 and remain below trend since, and for a stop-and-go QE strategy that undercut the policy’s effectiveness in changing the expectations of consumers, businesses, and investors.

Corker could have then praised Bernanke for finally moving to a steadier, rules-based, open-ended bond-buying program based on hitting clear economic thresholds. (Had the Fed better communicated such a strategy earlier, its balance sheet wouldn’t be so big today.) And then Corker could have nudged him to consider explicitly targeting the level of nominal GDP as way of meeting the Fed’s dual mandate. If Republicans are worried about an EU-style debt crisis, they should worry as much about weak nominal-GDP growth — the denominator in the debt-GDP ratio — as they do about discretionary spending levels.

Yet, as it is, the U.S., afflicted by slow growth and high debt, has now stumbled into a not-so-bad economic policy of modest spending cuts plus easier money. Add in some pro-growth tax and regulatory reform, and the U.S. would arguably have the most effective economic policy of any advanced economy right now. And standing in the way of that is the Obama White House, not the Bernanke Fed.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.



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