By Jeff Madrick

Central Banks Are Saving Democracy From Itself

September 17, 2012 2:55 pm Category: Memo Pad 5 Comments A+ / A-
Central Banks Are Saving Democracy From Itself

We may want more democratic control over the Federal Reserve, but its independence is allowing it to push back against austerity.

The Federal Reserve’s recent announcement of aggressive new policies is more than a little welcome. It involved a new round of quantitative easing focused on mortgage-backed securities, but more importantly, a statement that the Fed would keep rates low for a long time, even if the unemployment rate begins to fall markedly. In other words, the Fed will be more tolerant of rising inflation. A couple of points are clear and have been widely discussed:

First, more inflation is what this economy needs. It will reduce “real” interest rates down the road. It will also reduce the level of debt, which will now be paid off in somewhat inflated dollars. Lenders will pay the price; borrowers will benefit.

Second, the Fed is at last accepting its dual mandate, which is not only to keep inflation in check but also to keep unemployment in check as well. Inflation got almost all the focus since Paul Volcker’s reign in the early 1980s.

Third, inflation targeting as almost the sole purpose of any government policy is now either not applicable to current circumstances or never really was the answer to our prayers. The main claimant on the uses of either hard or soft inflation targeting was none other than Ben Bernanke himself. He was the champion of the Great Moderation, which held that less GDP volatility and low inflation were admirable ends in themselves — proof of a nearly perfectly managed economy.

Never mind that growth in the late 1990s was supported by high-tech speculation in the stock market, or that growth in the early 2000s was supported by a housing bubble and crazy, risky practices on Wall Street. And forget that job growth was the worst of the postwar period under George W. Bush, even before the 2008 recession, and wages had been performing poorly for 30 years. It was all really great, said Bernanke, and only a few mainstream economists disagreed.

But there is another point that needs emphasis and is being passed over. This one is about democracy. Bernanke is acting aggressively because the American Congress and president are locked in an austerity embrace. Fiscal stimulus is now turning into de-stimulus. Even the president’s budget calls for fiscal restraint. The deficit bugaboo is strangling the world.

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  • bcarreiro

    the price of raisins

  • Tom_D44

    So a third round of printing money is the brilliant idea of saving the economy? Or is it really just buying a little more time because we have that ability? Unbelievable how anyone can see good in this decision.

  • Dominick Vila

    Buying mortgage backed securities, easing credit, and keeping interest rates low are traditional tactics used to stimulate a slow economy, but what will really get the economy moving in a sustainable manner is large infusions of cash by the private sector. Unfortunately, many American investors are more interested in maximizing profits by investing in countries like China, Japan and Brazil than helping their country overcome the economic problems we still have. The problem is not that there is no money to invest in America, but that investors prefer to help others and themselves than helping their homeland.

  • Richie T

    You can’t build up a business without investing in it. Romney, I’m going to do everything I can to rebuild the economy of this country. If he isn’t lying, again, why doesn’t he pull his millions invested in off-shore corporations that are tax free, and invest them where they might actually help? It’s my money, I can do whatever I want with it, doesn’t work.

  • dljones

    Bernake is irresponsible and the fundamentals of economic growth is not infusion of more dollars. QE1-2-3-are proven disasters as government cannot drive the economy. They create “wealth bubbles” and then collapse.

    There is an ample amount of money on the sideline, including banks and, expansion for manufacturing. Obama has them paranoid due to the unpredictability of his health-scare, regulation, increased taxes, social welfare, and now the Federal Reserve stimulus imminently fuels inflation.

    Economic growth is spurred from the private enterprise and not government. This administrations massive spending, taxes, and subsequently regulates prosperity right off our shores.

    This social/Marxist malevolent “leader” is so stupid that he continues doing the same thing with the same results.

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