Politics is a funny thing. Even the most brilliant, cool and collected policymakers get stupid and frantic when faced with broad public disapproval. I guess that makes sense from a job security standpoint, but unfortunately the public isn't always right. In fact, it's often wrong. And that underscores a fantastic post from yesterday afternoon over at the Economist's Free Exchange Blog. It begins by noting that the IMF's global forecast warns governments against a "premature and incoherent exit" from economic stimulus. Of course, that's exactly what appears to be happening in the U.S.
The Economist begins with the thesis:
Partisans have aimed their poison at the Federal Reserve and at the government's fiscal policy choices but what, exactly, do they want? The logical implications of their complaints are contradictory at best and dangerous at worst.
The author, G.I., then goes on to explain how monetary and fiscal policies are both leading macroeconomics astray. I couldn't agree more.
The Bernanke reappointment situation is extremely undesirable. The sort of best-case scenario I can see there is that Bernanke gets reconfirmed, and then ignores policymakers completely from that point forward. As they whine about the Fed's balance sheet for the next year, he needs to plug his ears and hum. I have grave fears for anyone Congress puts in his place, because I think that new chair could be far less independent-minded than even Bernanke.
Unfortunately, I agree with the Economist post, which fears that the Fed will do too much to rein in credit too quickly. I am particularly worried about the credit markets once some of its financial crisis-driven programs like the TALF and mortgage-security purchase program end in March. Even if it doesn't touch interest rates, it can do serious harm if it withdraws credit markets' life support too quickly.
As for fiscal policy, many are freaking out about President Obama's spending freeze proposal. I'm less worried because a) I think Congress will kill it -- they couldn't even establish a deficit commission and b) even if it passes, it doesn't cut spending by very much -- just by whatever inflation turns out to be and only for discretionary spending. Is it an incoherent policy during a time of recession? Probably. But I view this as a pretty small measure in the grand scheme of the budget and economy.
So I see the Fed's potential misadventures as a greater threat than what we're seeing so far on the fiscal policy front. But with any luck, Bernanke will be reconfirmed and work harder at economics than politics.
But make no mistake: policymakers on both sides of the aisle are screwing up here. They need to take a time-out from reading public opinion polls and study some basic Great Depression economic history.
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