The Fed vs the Politicians

Last Friday, the top story in the Wall Street Journal was all about how our esteemed politicians on Capitol Hill jumped all over Fed chairman Ben Bernanke the day before.

It was the harshest public grilling for a central bank chief since the late 1990s... The mounting controversy over the Fed's involvement risks subjecting the central bank to the kind of political pressure it has managed for decades to resist.

As usual, our esteemed politicians seem to disagree amongst themselves as to exactly what is so upsetting about the Fed's actions.

Critics on the right, especially House Republicans who have long been suspicious of the Fed's power, say the central bank intervened too aggressively into the private sector. Critics on the left say it has been too opaque in its actions and too easy on big banks.

Publicly, the politicians are split as to why the Fed irritates them. But I suspect a hidden agenda: politicians wish they had more control over the Fed -- but they don't, and that's why they were acting like spoiled kids last Thursday. Bernanke handled his grilling with admirable composure, and as I watched a recording of the session, I thanked my lucky stars that our country is, so far, still following Alexander Hamilton's advice to be sure that control of the central bank is kept AWAY from the politicians. If that condition changed and our esteemed politicians somehow gained a much larger measure of control over monetary policy, I'd have to triple or quadruple the odds of a deflationary depression or of high inflation — or both of those disasters taking turns in a perpetual cycle.

Obama should reappoint Chairman Bernanke in January, period. Bernanke knows how monetary policy should be handled in unusual times like these, he's doing it, he openly explains it to us in terms we can understand (unlike any past Fed chairmen), and he somehow maintains his composure when being grilled by grandstanding half-wit politicians. Those are valuable skills, especially the last one.

Inflation/Deflation watch
For now, the Fed continues its success at preventing both deflation and inflation. Here's the latest Inflation/Deflation chart.

[If the politicians ever gain direct control of monetary policy, I'll have to expand the Y-axis scale significantly upwards and downwards.]

Comments

[Bob]

Conjecture around the net that Obama secretly wants Summers to take over the Fed. He may want to survey Harvard profs first, though.

This bad theater reminds me of the grilling General Petraeus received from the dunderheads on the hill. I shouldn't be too harsh, I guess. We do have the best Congress money can buy.

[timwalsh300]

Two thoughts...

1. Congress might be responding to the growing grassroots movement of anti-Fed, anti-fiat currency, deflation-loving, "gold bugs." This seems to have become much more popular since now regular folks have lost some trust in the financial system, and the conspiracy theories (which sound plausible to the uninformed) are readily available to anyone who decides to Google our banking/monetary system. Not many people are out there setting the record straight.

2. You may be right that Congress wants more control, but that is too frightening for me to think about. Whenever I'm talking to people who want to abolish the Fed and "take back the power to issue our own currency," I ask them if they really want to give Nancy Pelosi (or some other politician with an agenda and no financial background) the keys to the "printing press?" Personally, I like the idea of letting the financial experts manage the currency while under the watchful eyes of elected officials... it's a healthy and prudent balance of power.