In the past weeks, Federal Reserve chief Ben Bernanke has taken the prior reputation of the high priesthood of history's mightiest central bank—august, oracular, mysterious—and devalued it as surely as his bank has devalued the dollar over the past century.
Bernanke is facing the possible loss of his job come January, when President Obama either reappoints him or chooses a successor (current Obama administration economics czar Larry Summers heads the rumor list). Bernanke, or whoever succeeds him, will enjoy the dubious pleasure of managing the Federal Reserve's confrontation with the inflationary danger posed by a staggering increase in the monetary base (it has more than doubled) since the economic crisis began last year.
In the past couple of weeks, Bernanke has done a highly unusual song and dance defending his record, opining on The Wall Street Journal's op-ed page and touring Congress like a singer desperate to increase his album sales without any record label support.
In the past few months, Bernanke made public appearances unprecedented for a Fed chair, such as yakking it up on 60 Minutes and holding a press conference at the National Press Club. The ultimate humanizing step for this formerly mandarin office came when Bernanke took questions from a squad of supposedly ordinary Midwesterners about their confusions, doubts, and fears at a public forum in Kansas City, as if he were a monetary policy Oprah.
Bernanke's fighting not only for his own future, but for that of his institution. From angry right-populists in the street to standard Keynesians and monetarists in economic academia, from the House of Representatives to Obama's own Treasury Secretary Timothy Geithner, the Fed's probity and wisdom are being seriously questioned, and its responsibility for the current crisis taken almost for granted. In the quickest version of the story, the Fed laid the foundation for our current economic mess through its reckless suppression of interest rates in the early years of this decade, which it did to juice up the economy following the NASDAQ bust. This, the story goes, was a necessary condition of the housing boom and bust.
But of all the anti-Fed hostility, the element that seems to have Bernanke most worked up is H.R. 1207, a proposal by Rep Ron Paul (R-Texas) to "audit the Fed." The bill would eliminate some long-standing restrictions on where the Government Accountability Office (GAO) can look when it examines the Fed. Bernanke said in a July 21 appearance before the House Committee on Financial Services:
Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.
Ah, independence—who doesn't want plenty of it in monetary policy? Despite polls showing only 30 percent of Americans think the Fed is doing an excellent or good job—lower than both the CIA and the IRS—Bernanke blithely assured us that he doesn't "think the American people want Congress running monetary policy, and I think that's very, very critical for people to understand."
Who knows what the American people want when it comes to monetary policy? The vast majority of people know nothing about the subject. Folks trying to save a little cash wind up as suckers, with 60 percent of the value of their savings disappearing over the past 30 years. If they understood the role of the Federal Reserve in this devaluation, perhaps they'd want the power to inflate the money supply taken out of hands of government and disciplined by some sort of commodity standard. But that sort of idea just isn't on the agenda, and as long as the agenda is set by people like Bernanke, it won't be.
Still, I don't doubt for a second that having Congress in charge of a disciplineless paper money system would be a disaster. Given the political cover Congress gets out of the façade of Fed independence, I don't think Congress wants to run monetary policy anyway. It's to camouflage a lack of openness that Bernanke cries about theats to Fed independence.
Even only considering his behavior since the crisis began, and ignoring the Fed's history of collaboration with the goals and desires of presidents and treasury secretaries, Bernanke can't seriously expect Americans to believe that his institution is airily above politics, making decisions only based on advanced and disinterested economic wisdom.
The politics of his situation require him to do something, anything, even if the best thing to do might be to let the mistakes of the past decade—both the Fed's in keeping interest rates too low too long, and those of the thousands of individuals and companies sucked into bad investments to a large degree by the Fed's own policies—work themselves out. Even if that takes a little, or a lot, of temporary economic pain.
But allowing the economy to naturally experience pain—one of the supposed benefits of the independent Fed that Bernanke touts—is exactly what he's been unwilling to do. He tries to scare Congress away from Ron Paul's audit bill with fears of the dire economic effects of lost independence, even as he demonstrates over and over that he is clearly just one more member of the Obama economic team.
Bernanke has led the Fed in buying up mortgage securities and covering tens of thousands of auto loans and small business loans (both of which he crowed about in Kansas City) and giving direct cash infusions to selected companies. (Selected how? That's why some people think we need to audit the Fed.) The Fed is on board to take an even larger role in regulating financial markets. Bernanke even took time during that Kansas City pow-wow to tout the importance of cost-cutting health care reform. Consider it a hat tip to the boss.
Bernanke isn't blind to the tenuous and, in many ways, meaningless nature of his institution's "independence." As he told the crowd in Kansas City, "Our independence has to be won every day, if you will, in that we have to show that we are producing good results and doing so without intervention or interference from other political bodies." And to whom do you have to "show that [you] are producing good results," Mr. Chairman?
"Good results" are defined politically, not by the economic wisdom of Bernanke's team of experts. He talks of the Fed's readiness and willingness to rein in monetary growth exactly when it threatens to overheat the economy into inflation. But that will mean at least temporarily slowing down the stimulating effects of the rush of new dollars, which means risking a temporary economic downturn. He shows no signs that he is willing to make any decision that could pin bad economic news on the administration. If he does anything now other than exactly what the administration wants and needs him to do, he'd be out of a job early next year, and he knows it. And his current wave of self- and institution-justifying public appearances proves that keeping the job matters a great deal to him.
Bernanke may be losing Congress's confidence, and he may be losing China's confidence. He's in a rough position, and it's not all his fault. It isn't his fault, for example, that the federal government is planning to nearly double the national debt over the next 10 years. His talk of how the Fed will not monetize the debt is brave, but barely believable. All that nonexistent money the government is now spending and borrowing is going to have to come from somewhere, and if Bernanke or his successor wants to keep their job, it's going to come from them.
It's possible Bernanke's plan to somehow neutralize all the fresh money the Fed is creating will work. Perhaps he will actually remember this rhetoric about the importance of Fed independence and let momentary pain slam the economy, rather than priming the next boom and bust with eternally low interest rates. Perhaps productivity and employment will buoy up. Maybe, just maybe, Bernanke will earn accolades as the hero of the Great Depression that Wasn't.
That is surely his highest hope. He declared at the Kansas City forum that "I was not going to be the Federal Reserve Chairman who presided over the second Great Depression." Well, there's only one way to make sure of that, Ben. Considering all the complications and hazards facing both him and the economy he sees as his fragile charge, the real question the citizens in Kansas City should have asked was: Chairman Bernanke, why don't you just get out while the getting's good?