It seems as though everyone is bashing the Federal Reserve these days. In my last posting, I criticized the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2). Since that time, I’ve seen an onslaught of outrage directed against the Fed from across the political spectrum. Bethany McLean of Slate made a similar observation on November 9. As the subtitle to her piece suggested, people who criticized the Fed were usually considered “oddballs”. Ms. McLean observed that the recent Quarterly Letter by Jeremy Grantham (which I discussed here) is just another example of anti-Fed sentiment from a highly-respected authority. Ms. McLean stratified the degrees of anti-Fed-ism this way:
If Dante had nine circles of hell, then the Fed has three circles of doubters. The first circle is critical of the Fed’s current policies. The second circle thinks that the Fed has been a menace for a long time. The third circle wants to seriously curtail or even get rid of the Fed.
From the conservative end of the political spectrum, the Republican-oriented Investor’s Business Daily provided an editorial on November 9 entitled, “Fighting The Fed”. More famously, in prepared remarks to be delivered during a trade association meeting in Phoenix, Sarah Palin ordered Federal Reserve chairman Ben Bernanke to “cease and desist” his plan to proceed with QE2. As a result of the criticism of her statement by Sudeep Reddy of The Wall Street Journal’s Real Time Economics blog, it may be a while before we hear Ms. Palin chirping about this subject again.
The disparagement directed against the Fed from the political right has been receiving widespread publicity. I was particularly impressed by the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009. Here is the most-frequently quoted portion of Bunning’s diatribe:
. . . you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.
Michael Grunwald, author of Time magazine’s “Person of the Year 2009” cover story on Ben Bernanke, saw fit to write a sycophantic “puff piece” in support of Bernanke’s re-confirmation as Fed chairman. In that essay, Grunwald attempted to marginalize Bernanke’s critics with this statement:
The “Helicopter Ben” piece was written by Larry Kudlow. The “Zimbabwe Ben” and “Villain of the Year” essays were both written by Adrienne Gonzalez of the Jr. Deputy Accountant website, who saw her fanbase grow exponentially as a result of Grunwald’s remark. The most amusing aspect of Grunwald’s essay in support of Bernanke’s confirmation was the argument that the chairman could be trusted to restrain his moneyprinting when confronted with demands for more monetary stimulus:
Still, doves want to know why he isn’t providing even more gas. Part of the answer is that he doesn’t seem to think that pouring more cash into the banking system would generate many jobs, because liquidity is not the current problem. Banks already have reserves; they just aren’t using them to make loans and spur economic activity. Bernanke thinks injecting even more money would be like pushing on a string.
* * *
To Bernanke, the benefits of additional monetary stimulus would be modest at best, while the costs could be disastrous. Reasonable economists can and do disagree.
Compare and contrast that Bernanke with the Bernanke who explained his rationale for more monetary stimulus in the November 4, 2010 edition of The Washington Post:
The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.
* * *
But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.
Bernanke should have said: “Pushing on a string should help us fulfill that obligation.”
Meanwhile, the Fed is getting thoroughly bashed from the political left, as well. The AlterNet website ran the text of this roundtable discussion from the team at Democracy Now (Michael Hudson, Amy Goodman and Juan Gonzalez – with a cameo appearance by Joseph Stiglitz) focused on the question of whether QE2 will launch an “economic war on the rest of the world”. I enjoyed this opening remark by Michael Hudson:
The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy. But if you see helicopters, they’re probably not your friends. Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks.
At the progressive-leaning TruthDig website, author Nomi Prins discussed the latest achievement by that unholy alliance of Wall Street and the Federal Reserve:
The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election.
* * *
That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted. This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured. That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days. This ongoing bailout of the financial system received not a mention in pre- or postelection talk.
* * *
No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees. Score one for Wall Street. No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits. The Democrats couldn’t suggest that, because they were complicit. Score two for Wall Street.
In other words, nothing will change. And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.
The only thing I found objectionable in Ms. Prins’ essay was her reference to “the pro-bank center”. Since when is the political center “pro-bank”? Don’t blame us!
As taxpayer hostility against the Fed continues to build, expect to see this book climb up the bestseller lists: The Creature from Jekyll Island. It’s considered the “Fedbashers’ bible”.