Monday, January 25, 2010

Time for a Change at the Fed

What exactly did Ben Bernanke promise Senate Democratic leader Harry Reid? That’s the big question right now. Reid reluctantly endorsed Bernanke after a one-on-one meeting. Here’s what Reid said, according to the Las Vegas Sun: “I made it clear that to merit confirmation, chairman Bernanke must redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college, or start a small business.”

So, in a desperate search for votes, is Bernanke going around the Hill making easy-money promises? Even easier money than we have had in the last year? A Wall Street Journal editorial on Monday opposing Bernanke’s nomination is spot on. Monetary quid pro quos will destroy Federal Reserve independence and could generate yet another bubble.

And while Bernanke was right to gun the printing presses in the fall of 2008, he has overstayed his easy-money welcome by at least six months. The emergency has long passed, but the emergency policies continue. Breaking a window between 2002 and 2005 -- when Greenspan and Bernanke kept rates too low for too long (especially negative real interest rates) -- and then fixing that window later on is no way to run a policy.

Bernanke’s trillion-dollar purchase of mortgage bonds and other consumer loans is a fiscal action, not an appropriate monetary policy. Over the past year, while the dollar has fallen about 10 percent, and the gold price has risen 20 percent, the consumer price index has increased 2.7 percent with producer prices jumping 4.4 percent. Bernanke’s blatant disregard for preserving a stable King Dollar, and his stubborn resistance to using inflation-sensitive market-price indicators as a monetary guide, are two important reasons why he should not be reconfirmed.

Sen. John McCain intends to vote “no” on the Bernanke nomination, saying “I believe that he must be held accountable for many of the decisions that contributed to our financial meltdown.” McCain is dead right. The Fed missed the boat in terms of monetary and regulatory policy. It is time for a change at the Fed.

And following the Scott Brown victory, Republicans have an opportunity to push for a much sounder monetary thinker for the Fed post.