A tidal shift in governing influence is under way, because monetary policy is now eclipsed. As the central bank loses control, the stronger hand shifts to the fiscal side of government. That seminal insight originates with economist Paul McCulley, retired after many years as Fed watcher for PIMCO, the world’s largest bond fund. McCulley is a Keynesian who never bought into the ideological fantasy of self-correcting markets. His views won respect at the Fed because he was right. Only politicians still don’t get it. After thirty years of deferring to conservative orthodoxy, both parties are afraid to break from the past. While the Fed pushes for fiscal expansion, Congress and the president remain obsessed with deficit reduction.
“This was not supposed to happen,” McCulley observes. “The fiscal authority was always supposed to be afraid of the Fed. The Fed would say, Don’t do this, don’t do that. And the fiscal side would back off. Now you have a situation where monetary policy is effectively impotent and the Fed is openly inviting the fiscal side to do what for decades the Fed told it they couldn’t do.” The “missing partner,” McCulley says, is the fainthearted politician who clings to old dogma about fiscal rectitude, even though the crisis has made those convictions “irresponsible.”
As a longstanding critic of the Federal Reserve, I am experiencing a role reversal of my own. In the new circumstances, I find myself feeling sympathy and a measure of admiration for Bernanke’s willingness to stand up for unorthodox ideas and to switch sides on the sensitive matter of debt reduction for failing homeowners. For many years, I have assailed the institution’s unaccountable power and anti-democratic qualities, its incestuous relations with powerful banks and investment houses. Those flaws and contradictions remain unreformed, yet I now think the country needs a stronger Fed—a central bank not afraid to use its awesome powers to help the real economy more directly.
People ask, How come the Federal Reserve can dispense trillions to save Wall Street banks but won’t do the same to rescue the real economy? Good question. They deserve a better answer than the legalisms provided by the Fed. At this troubled hour, the Federal Reserve should find the nerve to abandon “failed paradigms” and to use its broad powers to serve a broader conception of the public interest.Read it at The Nation
The Federal Reserve Turns Left
by William Greider
(h/t Kevin Fathi via email)