With the Federal Reserve set to begin its third round of “quantitative easing”, the timing of its initiative, just in advance of a tight election fixated on the health of the economy, has raised questions about the agency’s much vaunted political independence. Already the target of a farrago of criticism from economists and politicians alike, Federal Reserve Chairman Ben Bernanke finds himself in the discomfiting position of having to defend both the economic wisdom and political legitimacy of his latest attempt to jumpstart a stubbornly lethargic economy.
The first, and maybe most conspicuous, issue is the limited expectation of any real impact: under Bernanke’s tenure, the Fed has already expanded its balance sheet from roughly $800 billion to $2.5 trillion, with QE3 likely to add at least a trillion more. Still, the GDP sputters along at anemic rates, the median household income has fallen 1.5% (8.1% since 2007), and 46.2 million Americans still languish below the poverty line (15% of the entire population). The only unambiguously quantifiable results have been staggering debt, creeping inflation, and an increasingly hobbled dollar. The very fact that the program is the third of its kind in quick succession is an indication of its underperformance: a truly effective plan would never have spawned progeny. Ben Bernanke is like a king who insists on having children until he finally produces a boy but is given one daughter after another, never to ascend to the throne. He gets an A for effort, and an A+ for blind faith.
The crux of QE3 is maddeningly similar to its predecessors: the Fed purchases mortgage-backed securities from big banks (to the tune of $40 billion per month), driving down interest rates, all that easy money greasing the wheels for banks to resume lending. Also, the hope is that this simultaneously flattens yields on government bonds shepherding investments into more profitable corporate stocks, further incentivizing the investment that leads to capital growth, and eventually, job creation.
The primary difference between QE3 and its earlier iterations is that the bond buying is now limitless, leaving the Fed free to print money ad infinitum. The Fed issued a statement describing this historic untethering of its powers in remarkably banal language:
“If the outlook for the labor market does not improve substantially, [the Federal Reserve] will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Given the unspectacular results of previous bond buying programs, and a fast approaching election day, the effective self-issuance of a blank check is suspicious, to say the least. Like QE1&2, the pumping of liquidity into banks is likely to stir a measure of short term market optimism, generating some signs of life in an otherwise invalid economy. But there is no generally accepted metric that predicts the maneuver will effect either real infrastructural change for the better or reasonably lasting results; in fact, the prior announcement of unlimited infusions of cash into the economy, essentially paving the way for QE4, 5, 6, etc., tacitly admits the lack of optimism regarding the program’s effectiveness. What will follow is an endless series of shallow bumps, bought at the expense of debt and the value of the dollar, until……Obama is elected for a second term.
And Bernanke himself had insisted that quantitative easing is no “panacea”, intended to single handedly revive the economy from its protracted slumber. He is well aware of its real economic limitations: the banks have no shortage of available capital sitting on over $1.5 trillion in reserves (big corporations are currently sitting on more than $2 trillion). Banks have generally refrained from lending (and corporations from borrowing) not because they’re light on cash but because the conditions conducive to genuine economic growth do not maintain. Also, the crushing freight of accumulated household debt, some $12 trillion, means all the fiat money in the world isn’t going to catalyze investment, accept for the very wealthy. Finally, the prospect of an Obama victory in November has a dampening effect all its own, especially since he routinely advertises his hostility to business and gushing affection for growth killing tax hikes.
What amounts to $40 billion a month of Federal campaign contributions to Obama’s reelection efforts necessarily intensifies scrutiny of the Federal Reserve’s purported independence, already withering under the Klieg lights of relentless criticism from both sides of the political aisle. This is, by its own description, a stimulus plan, that will have enormous political efects on future spending, on the existence or termination of various governmental programs, on the burgeoning presence the government maintains in the private investment sector, on future tax rates, and yes, on the selection of the next occupant of the Oval Office.
On the bright side, Obama has, in an oblique way, made good on his promise to save public funding for political campaigns.
So now lingering controversy regarding the Fed’s independence from political accountability is again front and center; the insulation granted to the Fed by Congress in its original charter was premised upon its a-political character. But this is surely a move with deep and wide political consequences, a massive open-ended stimulus program that would likely be rejected if voted upon by Congress.
Also, there are persistent questions regarding Ben Bernanke’s own personal motivations for authorizing a program that will almost surely fail, will produce lasting economic damage, and only succeed at stimulating Obama’s electoral prospects. Bernanke has been dogged by criticism delivered by Mitt Romney and his campaign officials. Romney has called QE3 “the wrong way to go” and Lanhee Chen, his policy director, lambasted it as “artificial and ineffective”. She added, for good measure: “We should be creating wealth, not printing dollars.”
And Romney has made no secret of the fact that he intends to replace Bernanke as Chairman if elected president. Could this be incentive for Bernanke to bolster Obama’s election fortunes? Economist Mark Skousen wonders if:
“…Bernanke is so anxious to keep his position as Fed Chairman and reelect President Obama that he willing to risk the Fed’s longstanding political independence, and even worse, runaway inflation”.
The politicalization of the Fed is not exactly unprecedented: Nixon demanded a regime of easy money to raise his own campaign hopes prior to the election in 1972 and George Bush famously attributed his own second term loss, at least in part, to the Fed’s reluctance to lower interest rates. Senator Chuck Schumer has been openly advocating for a new round of quantitative easing explicitly for the sake of improving Obama’s record on the economy.
Bernanke insists that maintaining the political independence, and non-partisanship, of the Fed is a central objective:
“We have tried very, very hard and I think we’ve been successful…to be non-partisan and non-political. We make our decisions based entirely on the state of the economy…so we just don’t take these [political] factors into account.”
But whatever Bernanke’s own personal motivations may be, free from or encumbered by political inclinations, the transformation of the Fed since the late 1970’s makes any genuine encapsulation from the gravitational draw of partisanship impossible. Originally created with the singular mission of price stability, or the preservation of the dollar’s value, Congress amended the Fed’s mission in 1977 to encompass a dual mandate: they are now charged to “promote effectively the goals of maximum employment”. Let’s leave aside the problem that these two goals potentially conflict with each other, the tools for securing one ineffective in the service of the other. The more pressing problem is that the dual mandate added fiscal policy to the Fed’s jurisdiction over monetary policy, charging it with goals that are necessarily political in character. Also, the addition of employment to its purview planted the now sprouting seeds of mission creep: in 2007, Frederic Mishkin, then Governor on the Fed’s Board, claimed a shockingly aggrandized scope for the agency, tasked with the “ultimate purpose of fostering economic prosperity and social welfare”. This is a far cry from a narrowly defined purpose, designed so amorphously it would predictably, even necessarily expand over time.
The Fed’s clumsy incursion into the market will forestall real legislatively directed economic reform, kicking the can of responsibility yet further down a dark road, that leads to pulverizing debt and long term economic languor. We know what this place looks like; it looks like Greece. Whatever rabbit Bernanke can still yank from his hat of monetary tricks is illusory–the best QE3 can achieve is the mirage of “wealth effects”, the artificial high that is closer to momentary intoxication than to stable contentment. Another tranche of easy money will only mimic economic growth, the cheap and ephemeral satisfaction of drug induced hallucination, not create it. Real wealth will only result from sound fiscal, not monetary policy: the lowering of marginal tax rates, the elimination of unwieldy regulation, and the trimming of a corpulent government bureaucracy.
Whatever Bernanke’s motivations may be, the essential problem is that the question of his objectivity must be raised at all, and it must, because the Fed is no longer a non-political entity, though it still enjoys protection from the accountability any political agency should bear. Whether he likes it or not, Bernanke just pledged what will likely amount to a trillion dollars of taxpayer money to Obama’s reelection, thereby impacting not only the economy, but potentially immigration policy, the next Supreme Court nominee, education, and even more urgent determinations, like questions of war and peace. In exchange for powers so consequential, he should have to answer to Congressional oversight, to the consent of the people. Or better yet, he should stick to monetary policy.