Wednesday, September 21, 2011


The Republican leadership of the sent a letter to Mr. Bernanke the other day "encouraging" him not to become involved in the political process doing anything they didn't like such as doing his job.  Trust the Republican leadership to do or say something stupid when the clear alternative is to do or say nothing at all, but it did highlight a problem that deserves some discussion which is what is the job of the Federal Reserve.

Unlike it's counterparts, the Fed has two jobs, the first being to maintain price stability which is another way of saying "protect against inflation," and the second, within the parameters of the first, to promote full employment...however that might be defined.  Job 1 is, for a central banker with a broad monetary mandate, easy.  Bring interest rates up to 20% as Paul Volker did in 1981 and you kill any inflation that's hanging around stone cold dead.  You also kill heavily indebted countries like Mexico stone cold dead, but that's another story.  Job 2 on the other hand is a lot more difficult.

I, for one, think it's a really bad idea for a central bank to be saddled with the second chore particularly if one supports and appreciates the independence of a central bank.  Indeed, it is damn near impossible.  Even more unsettling, again at least to me, is that it enables politicians to do what they do best; pass the buck and avoid the hard decisions that sometimes must be made.  In support of this thesis I offer up our situation today.  The managing of an economy--indeed, if economies especially one the size of the United States--can be managed at all is an uniquely political event requiring advice and support from monetary authorities, but to be frank it is not a task that fits their skill set.  And so Mr. Bernanke & Co. finds itself in an awful position in attempting to fill this second role being assured of only one thing; half the country is going to be hopping mad at whatever step they take to fulfill their role.

It gets worse.  Recognizing that folks might wise up to the quandry, our old friend Barney Frank has just introduced legislation to fully politicize the Fed Open Market Committee by removing the voting rights of the four regional governors (who rotate among the twelve) and replacing them with political hacks to overtly do the bidding of the politicians.  Now Barney is a slug but he's not stupid.  Barney knows that this is his party's last shot and he also knows that unless this economy can be immediately stimulated, 2012 could be a very bad year for his party.  The future is now.  The long term effects of such a ploicy change are of no concern.  It is madness, of course, but madness for a reason about which Barney chooses to have no clue.

The OMC held its usual two day meeting yesterday and today.  It was widely expected that they would enter into a "twist" operation which, briefly explained, is an attempt to influence the longer end of the curve as opposed to what central banks usually do, confining themselves to the very shot end.  That is precisely what the Fed did but in a somewhat unexpected manner.  The amount in question was $400 billion but it was a steralized move the Fed announcing that it would sell short maturities and with the proceeds buy the long end of the curve beginning at 32% of 8-10 year and finishing with 29% of 20-30 year maturities.  Net monetary change: zero.  The Fed acted to perform under it's second mandate and did nothing.  Oh yes, they did take everybody out of the auction for the long bonds (where nobody wanted to be in the first place) as the amount just happened to match the Treasury's announced intention and it will knock down medium term rates (read mortgage rates) which will not help refinancing one bit as the problem is not interest rate but valuations.  What the Fed did will have no real effect on anything, so its madness.   But..................

Mr. Bernanke did his job and in so doing he told the politicians that the Fed was done and the rest was up to them.  I also believe that Mr. Bernanke has finally resolved himself to the fact that there is nothing he can do; that the problem is not monetary but structural; that he doesn't do structural and is trying to tell the jerks on the Hill and in the White House in a truly gentlemanly way, to get off his back.  There's only one problem to that admirable approach:  there's nobody out there smart enough to understand what just happened.  "Tis' madness, yet there's method in it."  Bravo.

1 comment:

  1. Why does everyone keep insisting that the Fed has a DUAL mandate? It actually has a TRI-PARTATE mandate:

    Section 2A. Monetary Policy Objectives

    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of:
    1) maximum employment,
    2) stable prices, and
    3) moderate long-term interest rates.

    Formatting is mine