The Federal Reserve's recent announcement of aggressive new
policies is more than a little welcome. It involved a new round of
quantitative easing focused on mortgage-backed securities, but more
importantly, a statement that the Fed would keep rates low for a long
time, even if the unemployment rate begins to fall markedly. In other
words, the Fed will be more tolerant of rising inflation. A couple of
points are clear and have been widely discussed:
First, more inflation is what this economy needs. It will reduce
“real” interest rates down the road. It will also reduce the level of
debt, which will now be paid off in somewhat inflated dollars. Lenders
will pay the price; borrowers will benefit.
Second, the Fed is at last accepting its dual mandate, which is not
only to keep inflation in check but also to keep unemployment in check
as well. Inflation got almost all the focus since Paul Volcker’s reign
in the early 1980s.
Third, inflation targeting as almost the sole purpose of any
government policy is now either not applicable to current circumstances
or never really was the answer to our prayers. The main claimant on the
uses of either hard or soft inflation targeting was none other than Ben
Bernanke himself. He was the champion of the Great Moderation, which
held that less GDP volatility and low inflation were admirable ends in
themselves -- proof of a nearly perfectly managed economy.
Never mind that growth in the late 1990s was supported by high-tech
speculation in the stock market, or that growth in the early 2000s was
supported by a housing bubble and crazy, risky practices on Wall Street.
And forget that job growth was the worst of the postwar period under
George W. Bush, even before the 2008 recession, and wages had been
performing poorly for 30 years. It was all really great, said Bernanke,
and only a few mainstream economists disagreed.
But there is another point that needs emphasis and is being passed
over. This one is about democracy. Bernanke is acting aggressively
because the American Congress and president are locked in an austerity
embrace. Fiscal stimulus is now turning into de-stimulus. Even the
president’s budget calls for fiscal restraint. The deficit bugaboo is
strangling the world.
Those who want to make the Fed more subject to democratic control –
and to a degree, I am sympathetic -- should heed a lesson here.
Democracy -- that is, a democratically elected Congress and president --
is choosing a damaging course of austerity. In Europe, it is far
worse.
Needed policies are coming from America’s central bank, which was
deliberately created as an independent entity. Note that it is Romney
who is saying he wants Bernanke out of there and crying wolf about
inflation. Bernanke, not subject to the whims of democracy, has had the
courage to change his own thinking. He knows the consequences of tight
policy now.
So what do we do? We should be a little modest about the universal
benefits of democracy. For example, I think democracy may yet work to
end the severest levels of austerity in Europe. People are mad.
Governments are changing for the better. Demoracy in America is the only
answer to an ever-richer and more powerful oligarchic class in the
U.S., which wants to lower taxes, limit regulations, and cut government
into ever smaller pieces.
But we must also deal with the disturbing fact that one of the
least democratic of our institutions, the Fed, is the only one saving
the day now. The same is true in Europe, where the European Central Bank
is now acting intelligently, in contrast to the fiscal hawks dominated
by the German policymakers and apparently supported by a majority of the
German people. This issue is not simple.
