Opinion: Government: Meddling with monetary policy

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Echoing Texas’ two Republican presidential candidates, Gov. Rick Perry and Rep. Ron Paul, the top four Republicans in Congress have written a letter to Federal Reserve Chairman Ben Bernanke telling him to keep his hands off the money supply:

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers.

Wait, what? The weakened U.S. dollar is fueling exports, a segment of the economy that’s critical to the recovery. Meanwhile, the vigorous deleveraging by consumers -- and banks and businesses -- is one of the fiercest headwinds that’s holding back growth. The authors’ concerns may be valid at some point, but not while so much of the country’s productive capacity is idle.

The Fed has taken all the conventional steps to try to goose the economy, reducing short-term interest rates to, in effect, 0% and pledging to hold them there. But there’s evidence that banks are still keeping a tight fist on credit: In other words, the supply of money for consumers and businesses is painfully short. New York Times columnist Joe Nocera offered an instructive take on this, elaborating on the eye-opening (albeit wonkish) research by economist Paul Kasriel at Northern Trust. The 2008 financial crisis caused the biggest contraction of credit since World War II, Kasriel says, and so far banks have not ‘meaningfully’ loosened their lending practices.

Bernanke’s specialty as an economist is the Depression, and like conservative economist Milton Friedman, he believes that the Fed’s tight-money policies exacerbated the situation in the 1930s. His moves in the last three years show that he thinks deflation is a bigger risk than inflation, and that there’s too little money in circulation, not too much. Kasriel’s research supports this point of view.

GOP leaders are free to add their voices to the mix, of course. They have just as much right to advise Bernanke on monetary policy as he does to criticize Congress for its fiscal policies -- which he’s done, in a measured way. There’s only so much the Fed can do, Bernanke has said. But if Congress won’t use the tools at its disposal, Bernanke should keep trying to pick up the slack. The Fed is independent, after all, answerable neither to Congress nor the White House. That’s not a bug; that’s a feature.

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-- Jon Healey