Undeveloping our NationPosted: September 21, 2011
The importance of central bank autonomy has been an incredibly deep and absolutely noncontroversial line of academic research for decades. There’s all kinds of proxies you use in empirical regression models to measure how much or little political interference with central banks because high political interference has been shown to be extremely bad for a country’s economic performance. In the past, politically railroading a central bank–like the Fed–been associated with incredibly high rates of inflation and currency depreciation. I’m not in a habit of citing my academic research or my research sources here but the proxy I use to represent central bank authority in my study of foreign direct investment, trade, and optimal currency areas comes from this group of international economists at the IMF. It’s important in my line of research to control for items that basically show poor governance practices and strategies that tank an economy when you’re trying to study countries that are in the process of developing. In other words, what the Republicans are doing is a clear signal to economists, financiers and business they intend to put political power above the health o the economy. Here’s the IMF article if you want to give it a glance and you can check the ratings assigned to countries of the world.
Arone, Marco, Bernard J. Laurens, Jean-Francois Segalotto and Martin Sommer (2008), “Central Bank Autonomy: Lessons from Global Trends”, IMF Staff Papers
Again, there’s a really strong, direct, significant relationship between bad economies and a central bank influenced by politics It is one of the reasons that Greece and Spain had such horrible problems before they switched to the EURO. They still have horrible problems but it’s because of their fiscal policy now and not their monetary and fiscal policy. If you see a sign that a country’s central bank and monetary policy is overtly influenced by its politicians, bar the door! That’s basically a prime definition of banana republic and it’s not some where businesses put their investments or banks lend money.
So, in the spirit of current Republican vein of sending us back to our ante Civil War selves, why does this shock but not surprise me? Why don’t they just state their support for the mercantilism of the 18th century and get it over with? This isn’t your father’s, grandmother’s, or great grandparent’s version of capitalism. This is basically the kind of stuff you’d expect from the golden age of privateering and government-blessed trade monopolies like the Indian Tea Company when the king’s gold was all that mattered.
Here’s a statement from the General Manager of the Bank of International Settlements in Switzerland on modernizing and institution building in Albania from 2005 that’s germane to my argument. I’ll use this as an example of the general acceptability of what I’m saying rather than feed you about a 10 page bibliography of accepted research in the are from only the last two decades. It’s under his subheading of “secrets of success”. Again, my area of research is basically finding ways to get developing nations out of banana republic status while the Republican party seems to be working very hard at putting the US back there.
Over the past few decades, a consensus has emerged about what makes for good central banking. This has permitted central banks to deliver a very important public good ─ price stability ─ and has afforded them the opportunity to contribute to greater financial stability. One way of summarising this consensus is in terms of three key elements that make the central bank effective as a policy institution.
The first element is for the central bank to have a clear mandate. As Yogi Berra – the legendary American baseball player and manager of the New York Yankees – once said, “If you don’t know where you’re going, you will wind up somewhere else”. Central banks know where they are going. New central bank legislation generally accords primacy to price stability as an objective. Where statutory changes have not been made, existing legislation has been interpreted in such a way that achieving price stability is seen as the sine qua non for attaining mandated objectives. More generally, the public has come to expect central banks to deliver price stability.
The second key element is autonomy. If central banks are to achieve the objectives that have been set for them, they need to have sufficient autonomy to do so. Without it, there is a risk that short-term political or fiscal considerations will dominate. Therefore, central bank policy decisions need to be shielded from undue political pressure or sectarian interests.
Accountability is the third key element of effective central banks. It is closely linked with the other two. If a central bank is given autonomy to achieve a certain objective, it needs to be held to account for its success or failure; and the clearer the objectives, the easier it will be to determine success or failure.
Okay, so hopefully, I’ve convinced you that this is something nearly every economist, financier, and business operating throughout the world knows. So, why does Agent Orange and the Rindettes–Mitch MConnell, John Kyl, Eric Cantor– feel the need to buck modern theory and do this? (Okay, they deny all the theories of modern science, so why would economic theory be any different?)
Dear Chairman Bernanke,
It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.
We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.
Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.
We respectfully request that a copy of this letter be shared with each Member of the Board.
Not only is this appalling from a policy standpoint, it is basically asking the FED to ignore or break current law. There are laws on the books that mandate the fed to stabilize the economy; past LAWS PASSED BY CONGRESS! I now firmly believe that the Republican party intends to create the economic conditions of a country like Mexico. Their tax policies have been creating banana republic-like income equality. Their deregulation schemes have been creating banana republic-like crony monopolies. Again, this is policy made to eviscerate the middle class and create plantation and share cropper systems. Welcome back to the confederacy folks!
So, here’s a bit of the shock and awe the policy has left on the financial/economist community who have just about had it with seeing universally accepted lessons denied. From Stan Collender whose books I’ve taught from many times: GOP to Fed: Let the Economy Fail.
According to CNBC, the letter instructed the Fed “to refrain from further ‘intervention’ in the economy.
In other words, now that the GOP has made it all but impossible for fiscal policy to be used to improve they economy, they want to make sure that the only other tool the government has at its disposal — monetary policy — isn’t used either.
Why take on the Fed? The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority. Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving.
“Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers,” the letter from Republicans said.
Many economists, however, are unconvinced by these risks and argue that a weakened dollar would be good for the country because it would make American exports more attractive.
With unemployment at 9.1 percent and Congress unable to agree on fiscal policies that might encourage job creation, many advisers have been calling on the Fed to continue using whatever ammunition it has left.
The Federal Reserve is an independent body whose decisions do not have to be ratified by the president or Congress, and efforts to influence monetary policy are discouraged to maintain its credibility.
“Even if I agreed” with the Republican letter, Tony Fratto, a former adviser to President George W. Bush, wrote in a Twitter post, “I’d still disagree with the effort to put public political pressure on Bernanke.”
Over the years, there have been many efforts by members of both parties, from both the White House and Congress, to influence Fed policies, according to Allan H. Meltzer, a political economy historian at Carnegie Mellon.
Less than a year ago Michele Bachmann, a Minnesota congresswoman who is running as a Republican presidential candidate, sent a letter to Mr. Bernanke urging him to refrain from the last round of stimulus, which the Fed ultimately decided to do.
In recent months other Republican presidential candidates have stepped up their attacks on Fed policy, with Rick Perry, the governor of Texas, calling further easing “treasonous.”
Fed critics have said they are merely trying to counter pressure from Democrats for the Fed to do more.
“This is the most politicized Fed we’ve ever had,” Mr. Meltzer said. “They’ve been doing the Treasury’s work for quite some time, buying things like Treasuries and bonds. It’s no surprise that there’s political pressure coming from the other direction.”
The Federal Reserve was meant to be independent so that it would be shielded from short-term political interests, and Fed officials have repeatedly said they are unmoved by external political pressures. A Fed spokeswoman acknowledged receiving the letter on Tuesday evening but she declined to comment further.
Appearing to cave to political interests — on the left or the right — could compromise the Fed’s authority and jolt markets even more than a popular or unpopular policy decision.
Steven Benen is focused on why they would do such a thing and I have to agree that this is pure politics. The Republicans are so obsessed with regaining the White House and tanking the President, they are will to send us all straight to banana republic hell. This is the kind of behavior that assigns the sovereign debt of nations to junk bond status. Republicans are willfully trying to create a depression for all intents and purposes.
If this seems at all familiar, it’s because Republican leaders also wrote a letter to Bernanke last November, expressing “concerns” about the Fed’s efforts to boost economic growth.
There’s no shortage of problems with this. For one thing, the Federal Reserve is supposed to be an independent agency. This kind of partisan lobbying from congressional leaders is unseemly.
But given the larger circumstances, Republicans’ disregard for political norms is the least of the nation’s troubles. More pressing is the fact that the leaders of a major political party appear eager, if not desperate, to prevent steps that may improve the economy. The top four GOP members of Congress, including the Speaker of the House, practically demanded yesterday that no steps be taken at all as our anemic growth stalls and the job crisis intensifies.
The “sabotage” question comes up from time to time, and this certainly won’t help. As things stand, Republican leaders, some of whom have admitted that defeating President Obama is their single highest priority, now want the Fed to sit on its hands, want to strip the American Jobs Act of its most effective measures, and want to raise middle-class taxes. Oh, and they’re threatening to shut down the government, too. These are just the positions they’ve talked up over the last week.
Voters backed Republicans in last year’s elections because they wanted to see a healthier economy. The irony is rich.
To say it’s unusual for a political party to try to influence the Fed is an understatement.
When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics.
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose confidence in the independence of the Fed and its monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. Lending to the United States becomes a tad riskier. As a result, lenders charge us more.
The Republican letter puts Bernanke and his colleagues in a bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.
Congressional Republicans evidently don’t care. They want Obama out, whatever the cost. Besides, they’ve never met a government institution they don’t mind trashing.
Again, this is not the behavior of developed nations. We are facing the tyranny of a minority. It reeks of the kind of coup d’etat behavior you get from juntas in banana republics too.