The Fed’s applied progressivism
WASHINGTON — Because Ben Bernanke’s public persona is as mild as milk, the transformation in American governance in which he has participated is imperfectly understood and hence insufficiently deplored. The change is dramatized by two recent developments.
One was the campaigning by several constituencies for and against what supposedly were the two leading candidates — Larry Summers and Janet Yellen — to replace Bernanke as chairman of the Federal Reserve. The Fed can no longer be considered separated from politics.
The second, and related, development is the semantic infiltration of journalism by language that ratifies the Fed’s increasingly grandiose role. A Financial Times column on Yellen, now Bernanke’s presumptive successor, described her as “poised to take the tiller of the U.S. economy.” Oh? The economy has a tiller? And with it the Fed chairman can steer the economy? Who knew? On The Atlantic website, a columnist defends the Fed’s recent decision not to follow through on earlier intimations about reducing its monthly purchases of $85 billion in mortgage and treasury bonds. This, the columnist said, illustrates the Fed’s admirable “nimbleness.” A touch on the tiller here, a nimble reversal there — these express the fatal conceit of an institution that considers itself capable of, and responsible for, fine-tuning the nation’s $15.7 trillion economy.
Slowing the Fed’s bond purchases is called “tapering,” which means more modest “quantitative easing.” This is how governments talk when trying not to be understood. By continuing the pace of “easing” — printing money — the Fed has acknowledged that its fine-tuning has failed. The nimble, tiller-touching Fed assumed it would be more successful at reducing unemployment.
Well, to err is human. To assume that a few government officials can and should steer America’s vast, globally connected economy — hundreds of millions of people making trillions of decisions a day — is a kind of confidence peculiar to the progressive temperament. In December 2010, Bernanke had this exchange with Scott Pelley of CBS’ “60 Minutes”:
Bernanke: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time.”
Pelley: “You have what degree of confidence in your ability to control this?”
Bernanke: “One hundred percent.”
Bernanke once hoped that economists might (in John Maynard Keynes’ words) “get themselves thought of as humble, competent people on a level with dentists.” But Bernanke speaks the heroic language of a central planner, talking about the Fed’s tasks of “economic management” and “economic engineering.”
Of course he has confidence in the Fed’s abstract power to end zero interest-rate policy. Easier said than done. Rep. Kevin Brady, R-Texas, chairman of the Joint Economic Committee of Congress, notes that four years of ZIRP has become “monetary morphine” for Wall Street, which is addicted. The day the Fed reneged on its hints of tapering, Wall Street responded euphorically — the Dow soared 147 points.
ZIRP, which Yellen ardently supports, is trickle-down economics: Money, searching for yields higher than bonds offered under ZIRP, floods into stocks, the rising value of which supposedly creates a “wealth effect” — feelings of prosperity that stimulate spending and investing among the 10 percent who own about 80 percent of all stocks.
ZIRP also makes the Fed an indispensable enabler of big government. By making borrowing, and hence deficits, cheap, ZIRP facilitates the political class’s bipartisan strategy of delivering current benefits while deferring costs. ZIRP also provides cheap credit to big government’s partner, big business.
Originally, in 1913, the Fed’s mission was price stability — preserving the currency as a store of value. In 1977, Congress created the “dual mandate,” instructing the Fed to maximize employment. This supposedly authorizes the Fed to manipulate the stock market, part of Bernanke’s inflation of the dual mandate into “promoting a healthy economy.” Is a particular distribution of income unhealthy? The Fed will tell us.
The next Fed chair will put her or his hand on the economy’s imaginary tiller after politically muscular constituencies campaigned for her or his candidacy. What will this helmsman do when, say, the homebuilders and others in the construction industry clamor pre-emptively against any retreat from ZIRP?
The Fed has become the model of applied progressivism, under which power flows to clever regulators who operate independent of political control. The Fed is, however, a creation of Congress, which may not forever refrain from putting a bridle and snaffle on a Fed that increasingly allocates credit, wealth and opportunity.
George Will’s email address is firstname.lastname@example.org.