Thursday, November 11, 2010

The dangers of dragging the Fed into politics

Business Times - 12 Nov 2010


The dangers of dragging the Fed into politics

By LEON HADAR
WASHINGTON CORRESPONDENT

THE US Federal Reserve's decision to inject more money into the financial markets is being blasted by a prominent political figure - and I'm not referring here to the leaders of China, Germany or Brazil.

The former governor of Alaska and republican presidential candidate John McCain's 2008 running mate - and quite possibly a 2012 presidential candidate - may not be a leading economic policy wonk but Sarah Palin is now bashing the policies being pursued by Ben Bernanke, the Fed's chairman. She argued that the new round of quantitative easing (QE2) through the buying of US$600 billion in long-term US Treasury bonds - purchases that will total up to US$900 billion and be completed by the end of the third quarter of 2011 - posed a major threat to American and global economic recovery and could ignite inflation and devalue the US dollar.

Welcome to the Palin and Bernanke Show!

Addressing a trade association convention in Phoenix, Arizona, in the same week that President Barack Obama was travelling in Asia and defending the QE2, Ms Palin warned that it was 'far from certain that the Fed's monetary plan would work' and accused the Fed of trying to throw more money onto a problem 'it had helped to create'.

'What's the end game here?' Ms Palin asked members of the Specialty Tools & Fasteners Distributors Association trade show, raising a series of provocative questions: 'Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won't be followed by QE3, 4, and 5, until eventually - inevitably - no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?'

Her critique of the Fed is shared by many of the conservative and libertarian Republican lawmakers who will be in control of the House of Representatives and exert some influence in the Senate. These Republican critics of the Fed, whose views enjoy some support among free market economists, believe that the loose monetary policy promoted by the Fed indicated that it has become an adjunct, if not an enabling tool, of the expansive fiscal policies pursued by the 'socialist' Obama administration and that together - Mr Bernanke and Mr Obama - will only end up producing explosive federal deficits and put downward pressure on the US currency.

The attacks by Ms Palin and other Republican lawmakers and conservative pundits are creating the danger that the US central bank and its policies could be dragged into the heated political debate in Washington, and perhaps into the presidential election of 2012. And the perception that the Fed policies are politically driven and that Mr Bernanke - a Republican who was nominated to his job by the Republican president George W Bush - is a political lackey of the Democratic White House could threaten the independence of the institution which is, after all, one of the main reasons investors generally respect its decisions. In simple terms, a politicised Fed is an ineffective Fed.

Ms Palin's criticism comes at a time when the decision to launch QE2 is being criticised by leaders of China and Germany, who argue that by putting downward pressure on the US dollar and thus making US exports more competitive, QE2 amounts to a form of protectionism - the kind that Washington is accusing China of pursuing.

From that perspective, the criticism of the QE2 by Ms Palin and other Republican figures is bound to make it more difficult for President Obama during the G-20 and Apec meeting to persuade other world leaders to join the US in promoting a common strategy aimed at fixing the global financial imbalances.

Indeed, speaking during this week's stop in India, President Obama publicly backed the decision by the Fed which he argued would help foster global economic growth and trade. 'The worst thing that could happen to the world economy . . . is if we end up being stuck with no growth or very limited growth,' Mr Obama said. 'And I think that's the Fed's concern, and that's my concern as well.' At the same time, Mr Obama stressed that the Fed was an independent body and that Mr Bernanke 'doesn't take orders from the White House'.

But that is clearly not the way that Ms Palin and other Republican figures see it. Republican Rand Paul, the senator-elect from Kentucky, believes that the US central bank has been transformed into a political instrument of the elite in Washington and Wall Street. He thinks that Congress should audit the Fed on a regular basis, like it does other government agencies. This view is supported by many other Republicans as well as several progressive Democratic lawmakers who are expected to give Mr Bernanke a hard time in the next two years.

It is a pity that none of them were around during the era of the Greenspan put.


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