GOP letter to the Fed: A slippery slope

Marketplace Staff Sep 21, 2011

GOP letter to the Fed: A slippery slope

Marketplace Staff Sep 21, 2011

Kai Ryssdal: So that’s what the Fed had to say today about what its going to do. But earlier this week the central bank itself heard from the four top Republicans in Congress about what it shouldn’t do. They sent a letter asking the Chairman Ben Bernanke, politely, to basically not do anything before Election Day. It was an unusual letter. Joseph Gagnon ran the first quantitative easing program for the Fed back in the worst days of the credit crisis. He’s now at the Peterson Institute for International Economics. Good to have you with us.

Joseph Gagnon: Thanks.

Ryssdal: I said in the introduction this was an unusual letter that the GOP sent to the Federal Reserve, can you say unprecedented?

Gagnon: I cannot say unprecedented. There are always a few isolated members of Congress who are highly critical of the Fed, but this kind of written criticism at the highest level hasn’t happened in the past 20 years to my knowledge.

Ryssdal: What do you suppose the impact of this might eventually be? I mean, obviously we saw in today’s announcement that Mr. Bernanke is not so worried about what the Republicans think.

Gagnon: That’s what they’ll try to do. They’ll try to not let this affect their decision. But it’s hard to know how this could affect them in subtle ways.

Ryssdal: Well explain that a little bit. Are you gossiping by the watercooler at the Fed today as that letter comes in a couple of days ago?

Gagnon: Oh, I’m sure it’s a huge topic of discussion inside the building. I’m not there right now, but I’m sure they’re not very happy about it. Just to put this in context, around the world countries have basically set their central banks to be more independent. There’s still political control, but it’s more of a long-term goal setting and supervision, not day-to-day management.

Ryssdal: Is this what you might call a political-business cycle?

Gagnon: So the classic thing is the political business cycle idea, which is that the politicians who are in charge will take monetary policy and warp it to get the economy over-stimulated in the short run — which makes everyone happy and gets them reelected — and then soon afterwards we get the high inflation and then a recession and we all have a nasty hangover. In this case, it doesn’t seem like, in fact it seems the opposite — they’re trying not have the economy stimulated before the election, now you could argue that’s because they think the credit would go to President Obama. I don’t think it’s a slam dunk because there are serious people who would actually would agree with the position in his letter.

Ryssdal: But do those economists believe those politicians ought to be telling the Fed what to do or not to do on any given day.

Gagnon: Well, I would think that even economists who disagree with what the Fed has done have got to be nervous about this because this is a slippery slope, and if you get down this road where politicians start giving the Fed advice on how to do its job, that can be dangerous and can lead to bad things.

Ryssdal: I started the program this afternoon by pointing out that the Fed and its actions can be obscure and opaque and it’s tough to really figure out what they’re doing. What does this letter today do in terms of helping the public understand what the Fed does?

Gagnon: I don’t think this letter helps the public understand at all. But what it may do is it may force the Fed to try to communicate more. Maybe they really need to get out there more often and explain to the public, look, here’s what we’re doing and here’s why. If that’s the case, that would be a good thing.

Ryssdal: Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics in Washington D.C. He was for many years before that with the Treasury Department and the Federal Reserve, as it happens. Mr. Gagnon, thanks so much for your time.

Gagnon: You’re welcome.

Ryssdal: We called all four signers of that letter to invite them on the program. No takers.

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