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Don't blame the Fed

Amity Schlaes

KAI RYSSDAL: Ben Bernanke schlepped up Capitol Hill again today for an appearance before Congress. He spent a lot of time explaining why the recovery doesn't feel like one -- said it's faltering, in fact. The debt crisis in Europe. Weak consumer confidence. Poor job growth. All of them weighing down U.S. growth.

Mr. Bernanke also said the Fed is to ready help where it can -- a position that's not without its critics. Commentator Amity Shlaes, however, isn't one of them.


AMITY SHLAES: The nastier people are when they make an argument, the less evidence they have for it. That's one of the iron rules of life, and it also holds for the attacks on Ben Bernanke. Politicians might say the Fed chairman is overreaching or imperial, but they're skipping the substance.

The substance is that Bernanke did not make the Fed arrogant. The Fed's arrogance is institutional based on laws passed long before Bernanke was born. After the unemployment of the Great Depression, Presidents and Congress wanted to assure people that Washington would never let such unemployment occur again. Jobs, jobs, and jobs, were it.So Congress passed -- and President Truman signed -- a law called the Employment Act of 1946. Nothing subtle about that name.

Even if jobs weren't the Fed's traditional mandate, the Fed knew it had to help. Presidents helped, too. Presidents Eisenhower and Truman picked officials for the Fed who believed the Fed should manage both employment and growth.

That extra Fed job of managing employment was formalized in a later law. It was passed while Ben Bernanke was a mere grad student at MIT. This next Fed law, known as Humphrey-Hawkins, mandated that the Fed watch long-term growth. That's now code for "unemployment." So, twice a year the Fed chairman has to testify in front of Congress. And that means a grilling about jobs.

But the thing is government, whether the Fed, Treasury or Congress, hasn't proven very good at creating jobs in these last crisis years. Turns out a jobs obsession doesn't always lead to jobs. It is the private sector's turn to try to make jobs. But that private sector can only do so if the Fed moves out of the private sector's way. And that won't happen no matter how hyperbolic the critics get. The solution is a new Fed law that narrows the Fed's mandate to keeping money stable. Then the critics won't need to vilify the Fed head, whether it's Ben Bernanke, or someone else.


RYSSDAL: Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations. Send us your comments.

About the author

Amity Shlaes is author of the biography “Coolidge,” and she directs the economic growth project at the Bush Presidential Center.
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If consistency was a virtue, Ms. Schlaes unrelenting defending of Hayeck, Freidman and the Chicago School would make her one of the most virtuous among us. Unfortunately, consistency in the face of contrary facts is not virtuous or even sane.

Schlaes knows that the Fed has either ignored its dual mandate or expressed confusion about how serve two masters so it serves one - the financial industry. Schlaes knows it but repeats an argument without any basis in fact.

Her article also explains why we may be mired here for a long time to come. Business won't invest if they don't see a return. They aren't so concerned about taxes or regulation as economic activity. We are in a liquidity trap - no investment and no jobs. Either business must invest or Government must spend. Once government spends, the rest will follow but the spending must generate jobs, not more financial activity.

Schlaes is a bit of a gadfly - from an English major at Yale to a financial columnist to a economic historian. A little better grounding in theory based on fact would help her commentaries immeasurably.

I don’t blame the Fed, per se, anymore than I would blame Barack Obama, Ben Bernanke, or the Humphrey-Hawkins Act. I’m more inclined to blame every single proponent of supply-side economics and monetarism since 1980 and the election of Ronald Reagan, including Milton Friedman, Frederick Hayek, Maggie Thatcher, conservatives and moderates from both parties who bought into the program, and particularly those who continue to refuse to acknowledge its failings. That does not include Alan Greenspan, admirer and personal friend of Ayn Rand, who, for one, was honest enough to admit he and his (her) laissez-faire ideology were flat out wrong. Proponents of economic neo-liberalism have reneged on about every tenet of their own ideology when it comes to letting banks and the financial industry suffer a market correction. I just heard Bernanke explain today that part of the reason for the financial crisis was that “regulators didn’t do their job.” Okay, well, they weren’t allowed to because of the ideologues who headed the Fed, Treasury, and S.E.C., who did everything they could to keep OTC derivatives from being regulated, along with Republican lawmakers who paved the way for a deregulated environment, and a Democratic president who went along for the ride. Does that mean that government is to blame because “regulators didn’t do their job”; therefore (presumably), we need more supply-side solutions, including deregulation and rejection of Keynesian demand management policies? I don’t think so. Conservatives are great at co-opting, putting the cart before the horse, and blaming the victim, but circular arguments aren’t going to make it this time. Sorry.
As for Humphrey-Hawkins: If two of the four main goals of the act had been adhered to over the years—Balanced Trade and Budget—maybe we would never have allowed our tax base to become as regressive as it has; nor would we have tolerated decades of trade deficits; nor would we have allowed for the sort of global financial system that wants to ship jobs overseas and rule with impunity. You’re right, that isn’t the Fed; that’s Congress, conservatism, and an ideology of free-marketeering run riot, unaccountable, and unrepentant.

Amity Shlaes' knee jerk right-wing "get out of the way of business diatribe was more than nauseating.Combined with Kye's regular yet subtle "business uber alles" it left no doubt wherein the politis of Marketplace lie. As a small investor and one aware of cash flow, demand driven realities I am much disserved by such pap. Then there's the juvenile voice and the scolding tone. What is behind airing such a pseudo-intellectual twit anyway?

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