Sanders Hold Will Subject Fed to Needed Scrutiny

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Senator Bernie Sanders of Vermont is going to place a hold on Ben Bernanke’s confirmation. I expect what progressives excited about this are going to learn is that the Senate’s inane rules also have a structural bias and a hold on an establishment priority, like Bernanke’s confirmation, won’t be substantially held up by this move. That said, at this point I welcome increased public scrutiny of the Federal Reserve.

I do continue to think that the level of organizing focus on the specific issue of “auditing” the details of the Fed’s emergency actions from last year is somewhat misplaced. The real issue isn’t the worry that the Fed may have done too much to help out major financial services institutions, it’s that the Fed isn’t doing enough to deal with unemployment. The Fed is—rightly—operationally independent from short-term political considerations. But it’s a public institution that should be accountable to the American people. What’s more, as Eric Lotke points out Bernanke and the rest of the FOMC have a responsibility to live up to their statutory mandate:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Contrast this with Goldman Sachs’ forecast of the economic outlook:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.

This is not acceptable, and the FOMC has a legal obligation not to accept it. Some people think that there’s nothing the Fed can do beyond ZIRP to improve labor market conditions under the circumstances of a liquidity trap. Ben Bernanke himself, however, is strongly associated with the view that this is wrong. But if practical experience has brought him around to the conclusion that monetary policy has “run out of ammunition” and only further fiscal policy can avoid a years-long period of double-digit employment, then Senators should get him to say that. If he still thinks the Fed can’t run out of ammunition, then he should fire more bullets.

Lately there have been a lot of expressions of concern, from Bernanke and others, that the Fed’s independence may be compromised. The reality, however, is that the case for central bank independence rests on the body of empirical evidence indicating that central bank independence produces better results. The evidence for that is pretty strong. But that also means that the argument for independence isn’t handed down on tablets from God, it’s based on the calculation that independent central bankers will do a good job. “A peaking in unemployment in mid-2011 at about 10¾%” and “extremely low inflation – close to zero on a core basis during 2011” is not a good job.