In We Cannot Separate Politics and Economics. And Those Who Speak Out Against Bad Policy are Helping the Economy…And Our Individual Investments; Washington’s blog makes an important point about the poor state of economic analysis. Modern economists naively analyze the economy without regard to the interplay of politics:
Some people criticize the injection of politics into economic discussions.
But economic historians tell us that economists used to understand and accept that economics is wholly interrelated with politics, and that politics affects our economy. They note that modern economists have artificially tried to somehow separate the two, like Descartes tried to separate the mind from the body.
Indeed, the father of modern economics – Adam Smith – talked a lot about politics in relation to economics. Washington’s Blog
Recognizing the inter-connectedness of politics and economics, the discipline was originally referred to as “political economy.” In fact Georgetown University has a political economy major.
The blog goes on to criticize the multi-trillion dollar expenditures on the Iraq and Afghanistan wars and the consequent deleterious effect on the economy. Moreover, for the last ten years we have undermined any semblance of a free market by living under a state of economic emergency. We have massively lost trust in government. With the financial crisis and lack of prosecutions the public has also lost trust in our financial institutions, the SEC and the Justice Department. But what is missing from this excellent analysis is the role of the Federal Reserve.
The Federal Reserve: Earnest Technocrats or Politicians in Disguise?
The Federal Reserve has a limited statutory mandate: maintain full employment and price stability. Under Ben Bernanke the Federal Reserve has gone far afield from that mandate:
We now have a fourth branch, the imperial Federal Reserve. Without our permission, this rogue branch is dictating economic policy for the United States. Mission creep is taking the Fed from its dual mandates of employment and stable prices to its own self-proclaimed mandate: economic stimulation (in direct contravention of the views of the newly elected Congress and the American public) and dollar devaluation. In QE2 it also has taken on the role of guardian of stock market prices. See Who Elected Ben Bernanke?
Bernanke has crossed into the realm of political decision making:
- Ultra low short-term interest rates have fattened bank profits at the expense of retirees, pension funds and insurance companies.
- QE2 money printing has set off a speculative binge in commodities hurting consumers.
- QE2 has hurt the value of the dollar, favoring US exporters over foreign importers.
- Higher import prices have hurt consumers since we have de-industrialized America. Consequently, we are dependent on cheap foreign-made goods.
- QE2 has exported inflation to foreign countries. Revolutions in the governments of our allies, Egypt and Tunisia, are not a coincidence. Higher food prices in impoverished economies are a breeding ground for unrest. See A Perfect Storm in Egypt
- QE2 has set off currency wars and raised global tensions with China, the EU countries, Brazil, and emerging economies.
- QE2 permits the Federal Reserve to purchase a major portion of newly issued Treasury debt. This permits continuance of unprecedented federal budget deficits. Thus, Congress avoids making the necessary tough budget cutting decisions.
- QE2 has also perversely raised the all important 10-year Treasury note yield by 1.25%, thus increasing mortgage rates and retarding any housing recovery.
Holding the Federal Reserve Accountable
The Federal Reserve cherishes its vaunted independence. This independence was predicated on adhering to a technocratic, apolitical agenda of controlling money supply to provide a background for economic growth. The Federal Reserve is now overtly operating in a political role: it determines winners and losers in the economy (banks favored over savers), the value of the dollar (exporters favored over importers and consumers), and financial speculators (the wealthy over the middle class and Wall Street over Main Street). It is also interfering in foreign policy, exporting inflation in key commodities to foreign countries (many of which are our allies) and triggering a potential currency war and protectionism. Finally, Dr. Bernanke recently lectured Congress about deficits: a topic far afield from the role of the Federal Reserve. See Bernanke Makes Sure Fed Reminds Congress Deficits Bigger Than QE2
Let me repeat: Ben Bernanke was not elected and he is not a benign technocrat. Politics and economics are intertwined. He was wrong about the housing crisis, the financial crisis and QE1. Our politicians must rein him in and restore economic policy control to elected officials.
Some would argue that encroaching on Federal Reserve independence would undermine the institution hurting economic policy. The military is under the control of civilian political leadership and there is no uproar over “military independence.” If the military can be under political control then the Fed can be too. The real issue is accountability and the Federal Reserve has little, if any accountability. Conversely, it will also make our profligate elected officials equally accountable for economic policy.
It will not be easy or elegant, but it will begin to restore trust in our government and economy.
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