Central Bankers Back Bernanke Whose Critics Haven’t Been There

U.S. Federal Reserve Chairman Ben S. Bernanke
The 23 people who penned the missive to Federal Reserve Chairman Ben S. Bernanke this week telling him to arrest his expansion of monetary stimulus have something in common: They’ve never been in his position. Photographer: Tomohiro Ohsumi/Bloomberg

The 23 people who penned the missive to Federal Reserve Chairman Ben S. Bernanke this week telling him to arrest his expansion of monetary stimulus have something in common: They’ve never been in his position.

The letter, which said the Fed’s Nov. 3 decision to buy $600 billion of Treasuries will cause a surge in inflation, was signed by former Republican government officials, economists, columnists and even Dan Senor, a former spokesman for the U.S. military effort in Iraq. By contrast, many of the voices in defense of Bernanke have central banking on their resumes, with former Fed vice chairman Alan Blinder, former Bank of England policy maker David Blanchflower and Bank of Israel Governor Stanley Fischer all voicing support.

The rhetoric from critics without monetary-policy experience risks politicizing the Fed and interfering with its strategy to jumpstart an economic recovery that’s faltering, said John Lonski, chief economist at Moody’s Capital Markets Group in New York. It helped prompt a call from Republican lawmakers to strip the central bank of its responsibility for full employment at a time when the jobless rate has held at or above 9.4 percent since May 2009.

“It’s become overly politicized for reasons that escape me,” Lonski said. “They’re running the risk of having the criticism of quantitative easing backfire if it turns out that financial markets go into another dive and some say that’s because of strident criticism. The criticism also has the effect of bringing into play the possibility the Fed might have to reverse course.”

‘More Diverse Backgrounds’

The effort would have benefited from support by people with “more diverse backgrounds,” such as central bankers and business leaders who “actually create jobs,” Lonski said.

Signers of the letter, published in the New York Times and Wall Street Journal this week, said they agreed with Bernanke’s Nov. 4 statement that the Fed “cannot solve all the economy’s problems on its own.” The group, whose members include Weekly Standard Editor William Kristol and former Congressional Budget Office Director Douglas Holtz-Eakin, said “the planned asset purchases risk currency debasement and inflation.”

Fiscal and regulatory policies “must take precedence” over monetary easing in stimulating growth, said the letter, which was also signed by Paul Singer, founder of hedge-fund firm Elliott Management Corp. and a top Republican donor who raised funds for presidential candidates George W. Bush and Rudolph Giuliani. Stanford University Professor John Taylor, creator of a monetary-policy formula used by the Fed, also signed the letter. He was an undersecretary of the Treasury during George W. Bush’s presidency.

Bush Chief of Staff

Before founding the Weekly Standard magazine in 1995, Kristol served as chief of staff to Vice President Dan Quayle during George H.W. Bush’s presidency and led the Project for the Republican Future. Holtz-Eakin is president of the American Action Forum and was an economic adviser to Obama’s 2008 Republican opponent, Arizona Senator John McCain.

Two signers, Kevin Hassett and Amity Shlaes, are columnists for Bloomberg News. Hassett, director of economic-policy studies at the American Enterprise Institute, was also an adviser to Senator McCain during the 2008 election and a former Fed economist. Shlaes, a senior fellow at the Council on Foreign Relations, was previously a columnist for the Financial Times and a member of the Wall Street Journal’s editorial board.

“I find the criticism just completely incoherent,” Mark Gertler, a professor of economics at New York University, said, adding he supports “reasoned” debates of the Fed’s policies.

Create Inflation

“The signatories of the letter are arguing that, on the one hand, it’s not going to do much to affect the real economy, and on the other hand, it’s going to create a lot of inflation, and you can’t have one without the other,” said Gertler, who pioneered research with Bernanke that showed how financial crises can accelerate economic slumps. “It would be comical if it wasn’t serious.”

The group’s objection was “that the Fed is dramatically expanding its size at a time when there’s not an emergency in the economy or the financial system to justify that expansion,” said David Malpass, one of the signatories and a former Bear Stearns Cos. chief economist who ran as a Republican candidate in New York for U.S. senator this year.

While the signers had “a huge amount of monetary-policy experience,” it lacked anyone who has actually decided on policy because “the Fed is a relatively closed club,” Malpass said. “That’s part of the problem. It’s very rare for people who have voted for the Fed to ever publicly criticize the Fed.”

‘Dangerous Practice’

The criticism “doesn’t make any sense, shows no practical understanding of how the economy works or how monetary-policy makers make their decisions,” Blanchflower, a professor at Dartmouth College in Hanover, New Hampshire, said in a Nov. 15 Bloomberg television interview. It’s “dangerous politics playing with an economy that’s fragile.”

While tax, spending and regulatory reforms would “absolutely” be beneficial, they aren’t “going to happen for a very long time,” Blanchflower said. “So the Fed is the only show in town.”

Stocks have climbed since Bernanke said on Aug. 27 that the Fed would “do all that it can,” which fueled speculation about additional monetary stimulus. The Standard & Poor’s 500 Index of stocks has returned 13 percent, while the yield on the 2-year Treasury note has fallen to 0.5 percent from 0.55 percent.

Lack of Diversity

Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts, said he agrees with the sentiment of the letter, though he didn’t sign it. Feldstein, who was chairman of President Ronald Reagan’s Council of Economic Advisers, has a “general policy” against signing group letters, and the lack of diversity among the signatories worried him, he said in a Nov. 15 Bloomberg Television interview.

“I’m a little concerned that the people who signed this letter appear to be all Republicans,” Feldstein said. “I think it would have been better if they had made it more bipartisan.”

Some Republicans in Congress advocate curbing the Fed’s responsibilities. Senator Bob Corker of Tennessee, who serves on the Banking Committee, Representative Paul Ryan of Wisconsin, who will lead the House Budget Committee in January, and Representative Mike Pence of Indiana, chairman of the House Republican Conference, have all said they favor eliminating the Fed’s goal of full employment, leaving it to focus on price stability.

Financial Crisis

Hostility toward the Fed is strong among Republican voters in the aftermath of the financial crisis, with 41 percent believing it should be abolished or radically overhauled, according to a Bloomberg National Poll conducted Oct. 7-10. Fifty-five percent of Tea Party followers, a collection of activists who want to curb government power, support its overhaul or elimination, the poll showed.

“There are people from all political persuasions who are very skeptical of the expansion of the Fed’s balance sheet,” Malpass said. The lack of political diversity among the signatories was a “coincidence of who was available to sign it as we were putting it together. It’s incorrect to say the letter politicized the issue.”

The Fed was founded in 1913. While Congress sets its mandate, politicians let it determine how to achieve those goals through monetary policy and allow it to resolve differences of opinion among its seven board members and 12 Reserve Bank presidents.

Dallas Fed President Richard Fisher, who doesn’t have a vote on the policy-setting Federal Open Market Committee this year, said Nov. 8 in San Antonio that quantitative easing may be the “wrong medicine.” Fed Governor Kevin Warsh, who voted for the action, said Nov. 8 in New York that the bond purchases may fail to help the economy.

Federal Bailouts

The Fed might have done a better job explaining how the expansion of monetary policy differs from federal bailouts of financial institutions, as the two actions “got conflated,” St. Louis Fed President James Bullard said Nov. 17.

Officials abroad have also spoken out against the U.S. central bank, with German Finance Minister Wolfgang Schaeuble calling the asset-purchase program “clueless” and suggesting it’s designed to erode the value of the U.S. dollar.

Bank of Israel’s Fischer has been supportive, saying the criticism is “fundamentally misplaced.” The latest round of monetary stimulus is “a move which is healthy for the global economy,” Fischer said in a Nov. 15 conference call with reporters. “I much prefer ‘Situation A,’ with U.S. growth and a slightly weaker dollar, to ‘Situation B,’ slower U.S. growth and a stronger dollar.”

‘Radical Departure’

Blinder, a professor at Princeton University in New Jersey, dismissed charges that quantitative easing is “a radical departure” and said in a Nov. 16 Bloomberg Television interview that he is more worried about inflation being too low than too high.

The consumer-price index increased 0.2 percent in October, less than economists forecast, after a 0.1 percent rise the prior month, the Labor Department said Nov. 17 in Washington. Excluding food and fuel, so-called core costs rose 0.6 percent from October 2009, the smallest gain on record.

Bernanke traveled to Capitol Hill Nov. 17 for a closed-door session with about 11 members of the Senate Banking Committee to defend monetary easing. He told the group that the program would create jobs while keeping inflation under control.

The four top Republicans in Congress also wrote Bernanke to express “deep concerns” over the bond purchases. The letter was signed by House Republican leader John Boehner of Ohio, House Republican Whip Eric Cantor of Virginia, Senate Republican leader Mitch McConnell of Kentucky, and Senate Republican Whip Jon Kyl of Arizona.

“There is plenty for the new Congress to do as it is, why add to their workload by taking on the potential long-term inflation threat of quantitative easing?” Lonski said. “It doesn’t seem to make a great deal of sense to get worked up over this particular issue.”

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