Pure Common Sense

Just four days ago today President Obama announced that he will reappoint Ben Bernanke to his current position as Chairman of the Federal Reserve.  In my view, it is still a little too early to determine what the reaction to the move from the general public is.  Ben Bernanke has been both praised and criticized from all sides.  Some say he has helped to mend the current world economic and financial crisis and that we are now on a sure, one-way road to recovery.  Some say that he has made matters worse off of his inflationary policies in the market.  Some say he did not cut interest rates by enough.   Obama seems to be satisfied with him, though.  He claims that Bernanke prevented “another Great Depression.”  What is interesting to note is that there could have been another Great Depression in the decade before the actual Great Depression in the early 1920s.  However, history books tend to gloss over it simply because it never happened.  I guess the harder we fall, the bigger the lesson.

Bernanke’s views on issues external to monetary policy such as fiscal policy and taxation are rather hard to pinpoint simply because he has never commented on them directly on record.  His predecessor, Alan Greenspan, was not shy about diverging his opinion on such issues.  I read his book The Age of Turbulence a couple of years ago and highly recommend it to anyone interested in economics or international politics.  Or both.  Greenspan described himself as a “libertarian republican” politically and used his influence towards politicians in policy discussions.  Bernanke, by contrast, has distanced himself from his predecessor.  It is hard to say whether he is distancing himself from Greenspan’s politics or the more general principle of the involvement of the Fed in policy matters.

One cannot ignore the controversy that has surrounded the Fed in recent years.  The Fed was created in 1913 and has been the primary institution in American monetary policy since then.  Prior to 1913 monetary policy was primarily handled by Congress.  The Fed has strived to maintain itself as an independent institution outside of the unstable realm of politics in order to safeguard the security of the American dollar.  This can either be a good thing or a bad thing.  It can be a good thing because the Fed is unable to be pushed around by mob rule and can supposedly handle crises with more accuracy.  The downside is that being less accountable to the people means being less accountable to this mission in the first place.  Critics of the Fed note that powerful financers and bankers hold too much collective influence in society and they blame this on the role of the Fed.  There is a (mostly intellectual) debate over whether there should even be a Fed.  Ronald Reagan actually toyed with that question while he was in office.  After all, why can’t the market set interest rates just as well, if not better than an outside managing entity?  A concern of mine is that for nearly a century we have lived in a society with the Fed and if one suddenly removed it, how would our economy, which is not used to determining interest rates in recent years, react?

Another (this one more political) debate is whether the Fed should be subject to more regulation than it is today.  In the current Congress, similar bills in the House and Senate hold 282 and 23 cosponsors to support running a full-scale audit of the Federal Reserve.  If the truth is really as grim as some speculators imagine, such an audit would bring that to light.  That could be catastrophic in the short-term but would likely be a good option in the long-term if that were the case.  That makes it a good idea.  Simple Common Sense warns of the dangers of exchanging the long term for the short term.  Doing it once will eventually come back to haunt you.  Doing it repeatedly is excessively unhealthy.  A similar bill passed in the 1990s, but Clinton vetoed it.  Obama’s position is currently unknown and although the bill is expected to pass Congress it requires the consent of another Democratic administration to pass since it is unlikely that his veto would be overridden.