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The Politeness Reflex

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"The Politeness Reflex"

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250px-Ben_Bernanke_official_portrait 1

Noam Scheiber has an excellent post about how Ben Bernanke’s determination to oppose change to the status quo is undermining any effort to actually preserve the Fed’s ability to set monetary policy without short-term interference from members of congress:

In his testimony, Bernanke suggested that the two proposals [from Chris Dodd and Ron Paul] were similar in spirit, in that both threaten the Fed’s autonomy. Paul’s audit idea would expose the Fed’s interest-rate setting to “short-term political pressure,” he brooded; reforming the regional bank boards would replace a “Main Street perspective” with a “Washington perspective.” In fact, the two proposals couldn’t be more different in this regard. The Paul idea really would undermine the Fed’s mission. After all, the whole reason for an independent central bank is that fighting inflation is painful in the short-run, but beneficial in the long-run. On the other hand, politicians are chronically bad at making short-term sacrifices for long-term payoffs. Allowing Congress to second-guess interest-rate decisions would be self-defeating.

By contrast, Dodd’s board-member idea would enhance the Fed’s independence. As it stands, the president of the New York Fed gets hired and fired by a board constructed by the very same mega-banks he regulates. If there’s an arrangement more likely to stifle aggressive regulation, I’m hard-pressed to think of it. (Under the circumstances, it’s remarkable that several recent New York Fed presidents were as effective as they’ve been.)

Which is why it was so disappointing to watch Bernanke dig in on this issue. The Paul amendment has a real chance of passing Congress. If Bernanke wants to stop it, he needs to come off as someone genuinely concerned about the Fed’s independence–which I believe he is–rather than as a chairman who reflexively opposes any change to the status quo. But to do that, he needs to honestly acknowledge the merits of Dodd’s board-reform proposal, and I saw no evidence of that on Thursday. However justified it may have seemed from the inside, it was a disservice to the institution he runs.

I’m not sure I understand where these conventions come from about when you are and aren’t allowed to question the good faith of powerful Washington figures. Scheiber has a sound argument here that Bernanke is behaving more like a reflexive opponent of change to the status quo than like someone with a well-honed concern for creating appropriate institutional arrangements. That seems like a pretty good reason to make it our working hypothesis that he is in fact more of a reflexive opponent of change to the status quo than like someone with a well-honed concern for creating appropriate institutional arrangements.

You would expect a Bush administration economic policy appointee to be interested in reducing government spending, in creating a business-friendly regulatory environment, and in securing the interests of prosperous asset owners rather than poor unemployed people. And Bernanke is a Bush administration economic policy appointee, and those appear to be the things he’s interested in.

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