Undeveloping our Nation

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.

Catherine Rampell at the NYT:

“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.

Here’s Robert Reich’s take: The Republicans’ Latest Ploy to Keep the Economy Lousy through Election Day.

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.

30 Comments on “Undeveloping our Nation”

  1. dakinikat says:

    More from Benen on the number of right, center right folks that think the GOP is beyond wrong on these kinds of moves:


  2. dakinikat says:



    Are they serious? We are living through the most rapid deleveraging of the American consumer since the 1930s. Much of that deleveraging is occurring tragically, through the process of bankruptcy and foreclosure. Some is happening more happily, through the increase in the savings rate from the 0 of the housing boom to about 6% now.

    Even if consumers wanted to borrow, credit is just not very available to the typical person right now. Some credit, for example on credit cards, is not cheap. In fact, the average APR on credit cards is scraping a record peak: 14.96%.

    As anxious as investors are about US personal debt however, they are blithe to nonchalance about the US public debt. Interest on that debt has sunk to record lows: under 2%.

    The markets see deflation and depression, not inflation. Yet ironically this non-existent and much dreaded inflation is exactly the remedy we need to lighten the load of consumer debt.

    As is, we’re looking at a continued economic slump, more unemployment, and more deleveraging via continuing catastrophic consumer default on mortgages, car loans, credit cards, and student aid. And now the GOP leadership is urging that the Federal Reserve make the catastrophe worse? To what end?

    I know what the detractors will say: to the end of defeating President Obama and replacing him with a Republican president. And if you’ve convinced yourself that Obama is the Second Coming of Malcolm X, Trotsky, and the all-conquering Caliph Omar all in one, then perhaps capsizing the US economy and plunging your fellow-citizens deeper into misery will seem a price worth paying to rid the country of him.

    But on any realistic assessment of the problems faced by Americans – and not just would-be Republican office-holders – it’s the recession, not the presidency, that is National Problem #1 and demands the most urgent action. It won’t be enough to save Obama if he does not deserve saving – but it may be enough to save your neighbor’s house, job, and family. Or even … your own. Republicans after all have been victims of this crisis too. It’s an hour of national emergency even more urgent and overwhelming than the aftermath of 9/11. And things may soon get worse, if the Eurozone begins to crack up, as it seems it may. This is the hour for united action against the economic crisis, not partisan maneuvering.

  3. dakinikat says:

    The Open Market Committee just flipped the bird to Agent Orange and the Rindettes:

    per CNN breaking news:

    The Federal Reserve pulled the trigger Wednesday on a widely anticipated stimulus move, a policy involving the sale of $400 billion in short-term Treasuries in exchange for the same amount of longer term bonds.

    The goal is to push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.

    “This program should put downward pressure on long-term interest rates and help make broader financial conditions more accommodative” the Fed said.

  4. Branjor says:

    Haven’t read this whole post yet, but

    Again, there’s a really strong, direct, signficant relationship between places where the central bank is influenced by politics

    ?? is the relationship between different places where the central bank is influenced by politics or between such places and other variables, such as high inflation, currency depreciation and other indicators of an unstable economy?

  5. Peggy Sue says:

    Thanks for a really informative article, Dak, written in readable language and with equally enlightening supporting materials. This only further cements my sense that Republican members have lost their minds and/or become so politically contemptible and compromised that they’re willing to put a gun to the temple of the Nation–as long as it means winning back the WH. What are they willing to do for American citizens? Not so much.

    I’ll be interested in seeing if this gets any play [and whine time] tomorrow during the next round of debates. Personally, I’ve been appalled by the first two debates. Might as well go for that 3rd strike.

    Thanks for the info! Important piece.

  6. northwestrain says:

    Real economists (such as yourself and those you’ve quoted) are appalled — this blog headline caught my attention: GOP Leaders Write Unprecedented Letter Urging The Federal Reserve To Keep Unemployment High. by Matthew Yglesias. Unfortunately he really didn’t explain “why”.

    Thanks for taking the time to give us the why — the GOP letter was in bad taste and shows the ongoing stupidity of the Republican leadership.

    I am assuming that perhaps 50% or more of the current unemployed are Republicans and that also a huge number living under the poverty line are also Republicans — if so — do these Republicans really believe the BS coming from the GOP leadership?

  7. Woman Voter says:

    Tweety Bird just said;

    Obama is neck to neck in poll with Sarah Palin and she isn’t even running

    ! Oh, Tweety Bird looked upset, almost coming through the screen with THE SKY IS FALLING!

  8. joanelle says:

    NWRain said: “Thanks for taking the time to give us the why — the GOP letter was in bad taste and shows the ongoing stupidity of the Republican leadership.”

    You know for a long time I thought they were just “stupid” too; but I’ve come to the belief that they might not be the sharpest knives in the drawer, their thinking is very immature – they really do think like frat boys – and I’ve heard they are living like frat boys too – they sleep in their offices and shower in the gym in the same building and have a singular focus on regaining the WH – not helping the citizens who put them there, not strengthening our economy, not solving any of the real problems this country is facing – if I were a conspiracy geek I’d be sure it’s a set up by some foreign foe. and they never connected the dots to realize that people voted for them to send a message to the Democrats not because they thought the tea partiers were a great bargain.

    And for the theory that we can’t stop the “fight against terrorists” because they “will destroy our country they’ve already won – they’ve destroyed our way of life, travel isn’t much fun anymore, the economy is broken, we’re sending billions of dollars every month to support 2 unnecessary wars and lord only knows how much overseas to support other countries while our own people are homeless and hungry. Bring everyone home and invest that money in their salaries as they rebuild our infrastructure.

    • northwestrain says:

      Travel is rotten — no matter the means you choose to travel.

      We had our sailboat boarded by homeland security/CG jerks — no respect for our boat — they wore black tar combat boots and left streaks on the deck. This is a so called “random” safety check. These homeland terrorist have destroyed boats and damaged nearly all private pleasure crafts they have boarded.

      Then crossing boarders between some states — mostly the southern states — more terrorism against We the People.

      The message seems to be — don’t travel. This started under the bush gang and has been widened under the 0 team.

      What do the Republicans really want — they have a prez giving them everything they are asking for — and yet they still want the WH — what is their ultimate agenda (besides turning all breeding age females into slaves)?

      • joanelle says:

        I’m not sure what they want, besides the WH – I guess we’d have to think like frat boyz – well, hmmm, I guess it’s simple enough to define – sex and power. 😕

  9. Woman Voter says:

    Although she has not publicly decided to run for President, a new McClatchy-Marist poll shows former Alaska Governor Sarah Palin trailing President Obama by just 5 percentage points.

    Earlier this year, Obama led Palin by more than 20 points but a huge shift among independents has made a big difference.

    According to the poll, independents favor Palin 47 percent to 43 percent.

    Continue reading on Examiner.com Poll confirms Sarah Palin within striking distance of Barack Obama – Spokane Conservative | Examiner.com

    • joanelle says:

      It makes me wonder if we learned anything as a country from what Hill went through during the primaries – will other women have to go through it or will voters stand up and not take the abuse that they did from the MSM the last time -to the point that the DNC was able to pull the wool over voters eyes and give Hill’s nomination to O.

      • Woman Voter says:

        Will the DNC Ever let Hillary get her EARNED ROLL CALL VOTE?

        I guess we will have to wait for the next poll, but on Twitter there are some already tweeting ‘C8nt’ over and over again for Palin…still it was Hillary who was betrayed by her party.

        Obama 1984 Broken Promises – Hillary 2012

      • jawbone says:

        What does “C8nt” stand for? Meab?

      • Woman Voter says:

        I didn’t want to spell it out but will do this, ‘Cu8t’…you remember they called Hillary that and even made signs. The more they call Palin that the more they will put voters off.

  10. dakinikat says:

    Looks like some of the Republicans in the House are bolting save their own political asses:

    CNN breaking news:

    In a major blow to the Republican leadership, the U.S. House on Wednesday defeated a temporary spending measure that would have required spending cuts to offset additional money for federal disaster relief efforts.

    The additional funds are needed because recent major floods from Hurricane Irene along the East Coast and wildfires in Texas exceeded the amount these agencies have left in their coffers to support recovery and rebuilding efforts.

    The measure would have allocated fewer resources to the Federal Emergency Management Agency and the Army Corps of Engineers for disaster response than did the bill the Democratic-led Senate approved last week.

  11. northwestrain says:

    Apparently 0bowma doesn’t have a better understanding of Economics than the Republicans


    A couple days ago I suggested that Obama might not be particularly well-informed about economics:

    It seems increasingly clear that Obama doesn’t have a good understanding of economics. He approaches issues like a very bright non-economist using his common sense.

    It now appears that it’s even worse than I thought. I found this quotation from Ron Suskind over at DeLong’s blog.

    Both, in fact, were concerned by something the President had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled.

    “What was driving unemployment was clearly deficient aggregate demand,” Romer said. “We wondered where this could be coming from. We both tried to convince him otherwise. He wouldn’t budge.”

    I recall reading similar statements by his former colleagues at the University of Chicago. They’d make arguments to him, and he just wouldn’t seem to get the point. He’s obviously very bright, but it’s also clear that he falls into that relatively large group of Americans who have their own very strong views on economics, and couldn’t care less what professional economists think. (An issue recently discussed by Noahpinion, Robin Hanson, and Sean Carrol.)

  12. fiscalliberal says:

    Dak – I listened the afternoon to Bloomberg Radio where a lot of guests are interviewed. The consensus seems to be the FED has done what it can and the remaining FED actions left are margins on the edge. Discussion right after the FED announcement is the result is to flatten the treasury yeild curve ( suppress the interest rate) for a longer period of time. I think that means those of which have CD’s in banks will continue the near zero interest rate. The thinking is that the FED is trying to push people to stocks.

    Most if not all say the action needed is on the fiscal side which is the President and the Congress, Some one said that the downgrade of BOA and Wells is the recognition that these banks could fail. Some of the Financial people allude to the need for the government to bail the banks out. My question is: since when do the rating agencies have any credibiIity after what they did in the securitization industry. I wrote in and said that if the Government started to do that the Tea Party ranks would swell ten fold and many in congress would be vulnerable. This is why I think nothing will be done before the election.

    My view is a lot of the bankers have not learned their lesson and the only way to clean them up is let them fail in bankrupcy. Yes it will be nasty, but we can get the books cleaned up, the executives fired, let the stockholders and bond holders take the hit.

    I think a lot of people in government are purposly making this a mess to confuse the population. That or they are corrupt or incompetent. I doubt that few of them could have a conversation with Dak who would shred them with information. Hence they will not talk to the economists.

    I would add that I think the Suskind book is going to be trouble for Obama. Obots and the media are trying to defend Obama. The opposition will tie them up with unsubstantiated facts. Few of the populaiton will understand and will simply vote for change. It worked for George Bush.

    Some how a lot of stuff is exploding – time to get a good supply of popcorn and beverages.

    • jawbone says:

      A discussion I heard on WNYC, NYC public radio, was that this Twist II (first used in the Kennedy administration, and so named bcz the twist was popula at the timer) was intended to also keep long term interest rates low, as in mortgages.

      What did this group on Bloomberg think about the Fed buying up mortgage backed securities from Fannie and Freddie (mostly, from what was said).

      • fiscalliberal says:

        Fannie and Freddie were not discussed. One person said Fannie and Freddie were responsible for the Financial crisis. True they eventually contributed to the mess by lowering their loan origination criteris. However, I think the record will show that the Private Label Secuitization process (private banks) was in the tank, 2006 to 2008 and the banks knew it

        My view is the whole system was rotten but could have been head off if Greenspan or Bernanke by simply enforcing the in place laws to firm up origination criteria. Especially Greenspan was a acolyte of Ayn Rand who advocated the free market rule. Bernanke could have acted faster when he came in 2006. However he waited to 2008 and the damage was done. I think the system was already in trouble in 2006, but Greenspan and Bernanke said the system was sound. I think the banks knew they were in trouble in 2007 and were fighting to clear the books by selling the toxic securities to the public. Goldman Sachs was the most successfull in selling them and they wrote CDS insurance betting the securities would fail. By the way, a lot of this CDS activity was going on when Paulson was CEO of Goldman. So – he should have expected the result of Lehman going under in Sept 2008.

        • dakinikat says:

          Fannie and Freddie were part of the problem. However, they didn’t start the fire. Mortgage companies like Countrywide making NINJA loans to send up the securitization route did it. Fannie and Freddie just bought up a huge share of them and passed the trash because their executive compensation scheme encouraged it and elected officials loved all those loans. It started in the private market and they were responsible for the parts that should land them in jail. Like GS sticking its customers with the their trash and the making offsetting bets on their customers holdings. Perp Walks for all who did that.

    • dakinikat says:

      Well, the market wasn’t impressed. It’s down.The problem we have clearly needs fiscal policy and we’re not going to get it. The downgrades on bank stocks today I think recognizes they haven’t deal with their problems. They’re soaking up the fees and basically undercutting their mortgage portfolios with all those foreclosures. What are they going to do with the actual real estate? None of the real causes of the financial crisis have been addressed and all the republicans are out to lunch.

  13. dakinikat says:

    Dollar hits 7-mth high after Fed’s Operation Twist

    Republicans. WRONG again.