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Second-guessing the Fed


Paul Krugman goes directly at Ben Bernanke today:

Mr. Bernanke has received a great deal of credit, and rightly so, for his use of unorthodox strategies to contain the damage after Lehman Brothers failed. But both the Fed’s actions, as measured by its expansion of credit, and Mr. Bernanke’s words suggest that the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism — a sense that the Fed has done enough now that the financial system has stepped back from the brink, even though its own forecasts predict that unemployment will remain punishingly high for at least the next three years.

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

For more on the Gagnon report, see Matt Yglesias, or Gagnon himself.

One of the reasons I'd like to see a contentious debate over Ben Bernanke's renomination is that we seem long overdue for a contentious debate on what the Federal Reserve is actually for. Should it worry primarily about inflation, as has been the case since Paul Volcker hunted down stagflation in the 70s? About full employment, as directed in the Humphrey-Hawkins Act? Should it be entirely independent of political meddling, or should Congress routinely use its power of the chairmanship to set the institution's priorities?

We fetishize the Federal Reserve's independence, and I'd probably err on the side of preserving that particular fetish. Congress is a broken institution that's embarrassingly incapable of making hard decisions in response to real problems. But maybe the structure of the Federal Reserve's independence should be changed so that it's less reliant on banks. It's all worth thinking about.

Photo credit: Andrew Harrer/Bloomberg.

By Ezra Klein  |  December 11, 2009; 6:36 PM ET
Categories:  Federal Reserve  
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I do not understand Bernanke critics like Matt Yglesias and Krugman. Basically, all they want is Fed to expand the balance sheet (print dollars) to buy Treasury assets and Treasury is expected to borrow here:
- to lend money to small businesses without any regards to how those loans would be repaid or whether there is any business case for those loans;
- continue to fund State shortfalls where employees of State of Government would never compromise on their salaries; or
- some other variant of stimulus program where we are not sure of results.

Obama Administration is in bind not because Stimulus act did not deliver, but they 'over sold' it. They have lost their credibility there.

Coming back to Bernanke, Matt and Krugman want Fed to do this when Ron Paul has 300 House members gunning for the Fed Audit; including essentially Barney Frank in the bag. Meanwhile, in Senate there are at least 10 Dem Senators who will refuse the Government Debt limit increase unless we get some steps to limit the national debt.

Are Matt and Krugman drunk here? Both of them and critics like them are hypocrites and utterly irresponsible. In which world these guys live? Don't they have even basic political sense here?

If these guys feel so strong about their policy prescriptions; why not they think about contesting some elections? Otherwise such advise is absolutely equivalent of Neocons who exhorted Bush to undertake Iraq war with no accountability whatsoever.

There comes a point when such policy folks need to shut up their mouth because what they are advocating is beyond any limits of possibility.

If Krugman and Matt have answers how Fed / Bernanke could still do the 'magic' to increase the employment, WTF - please spell it out god da*n it!

Posted by: umesh409 | December 11, 2009 7:56 PM | Report abuse

I feel very strongly about the Fed, in particular, that its only structural problem is that it started paying interest last year on excess reserve balances -- see for the details -- which destroyed the commercial paper market. The TALF hasn't been able to replace the commercial paper market, not even a little.

I want to know who re-wrote the "bailout bill" in committee to give the Fed that power. See

Posted by: jsalsman | December 11, 2009 11:50 PM | Report abuse

It doesn't take a genius or an economist to understand that greed and corruption is a large part of our current crisis in the economy and the steady deterioration of the middle-class.

Thus, it is without doubt that a close look at the inner workings and deals of the secretive fed, if allowed, would reveal massive amounts of greed, corruption and even outright thievery within the fed itself.

This can not be allowed to continue.

Even if the fed is to maintain its independence, some amount of oversight is required to ensure that the fed remains an efficient and dependable (to the people) institution.

I don't know what form such oversight should take, but I would think the CBO or GAO might be a good start. At the very least, the public should have access to high-level details about the fed's balance sheets, operations, and so on. If such oversight is not provided for, I believe the viability of the fed will be endangered as more and more Americans become more suspicious of the fed and start to consider it as just another corrupt appendage of financial (wallstreet, banker) greed.

In sum, independence is no excuse for lack of proper oversight.

Posted by: Lomillialor | December 12, 2009 7:30 AM | Report abuse

There's some debate about what conflict exists between inflation-fighting and unemployment-fighting Fed policy.

Posted by: jeffwacker | December 14, 2009 12:40 AM | Report abuse

To specify: I'm not saying no relationship exists, but it changes across different time scales.

Posted by: jeffwacker | December 14, 2009 12:43 AM | Report abuse

"We fetishize the Federal Reserve's independence"

It should be mentioned that the Fed is largely independant from Congress, NOT from its shareholder banks.

Posted by: slantedview | December 14, 2009 12:28 PM | Report abuse

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