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By Jeff Madrick, originally posted on Next New Deal.

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We may want more democratic control over the Federal Reserve, but its independence is allowing it to push back against austerity.

The Federal Reserve's recent announcement of aggressive new policies is more than a little welcome. It involved a new round of quantitative easing focused on mortgage-backed securities, but more importantly, a statement that the Fed would keep rates low for a long time, even if the unemployment rate begins to fall markedly. In other words, the Fed will be more tolerant of rising inflation. A couple of points are clear and have been widely discussed:
First, more inflation is what this economy needs. It will reduce “real” interest rates down the road. It will also reduce the level of debt, which will now be paid off in somewhat inflated dollars. Lenders will pay the price; borrowers will benefit.
Second, the Fed is at last accepting its dual mandate, which is not only to keep inflation in check but also to keep unemployment in check as well. Inflation got almost all the focus since Paul Volcker’s reign in the early 1980s.
Third, inflation targeting as almost the sole purpose of any government policy is now either not applicable to current circumstances or never really was the answer to our prayers. The main claimant on the uses of either hard or soft inflation targeting was none other than Ben Bernanke himself. He was the champion of the Great Moderation, which held that less GDP volatility and low inflation were admirable ends in themselves -- proof of a nearly perfectly managed economy.  
Never mind that growth in the late 1990s was supported by high-tech speculation in the stock market, or that growth in the early 2000s was supported by a housing bubble and crazy, risky practices on Wall Street.  And forget that job growth was the worst of the postwar period under George W. Bush, even before the 2008 recession, and wages had been performing poorly for 30 years. It was all really great, said Bernanke, and only a few mainstream economists disagreed.
But there is another point that needs emphasis and is being passed over. This one is about democracy. Bernanke is acting aggressively because the American Congress and president are locked in an austerity embrace. Fiscal stimulus is now turning into de-stimulus. Even the president’s budget calls for fiscal restraint. The deficit bugaboo is strangling the world.   
Those who want to make the Fed more subject to democratic control – and to a degree, I am sympathetic -- should heed a lesson here. Democracy -- that is, a democratically elected Congress and president -- is choosing a damaging course of austerity. In Europe, it is far worse. 
Needed policies are coming from America’s central bank, which was deliberately created as an independent entity. Note that it is Romney who is saying he wants Bernanke out of there and crying wolf about inflation. Bernanke, not subject to the whims of democracy, has had the courage to change his own thinking. He knows the consequences of tight policy now.
So what do we do? We should be a little modest about the universal benefits of democracy. For example, I think democracy may yet work to end the severest levels of austerity in Europe. People are mad. Governments are changing for the better. Demoracy in America is the only answer to an ever-richer and more powerful oligarchic class in the U.S., which wants to lower taxes, limit regulations, and cut government into ever smaller pieces.
But we must also deal with the disturbing fact that one of the least democratic of our institutions, the Fed, is the only one saving the day now. The same is true in Europe, where the European Central Bank is now acting intelligently, in contrast to the fiscal hawks dominated by the German policymakers and apparently supported by a majority of the German people. This issue is not simple.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Comment Preferences

  •  Right. (1+ / 0-)
    Recommended by:

    "The Global War on Terror is a justification for U.S. Imperialism. It must be stopped."

    by BigAlinWashSt on Mon Sep 17, 2012 at 10:05:38 AM PDT

  •  Will wages keep up with inflation? (4+ / 0-)

    Not until the unemployment rate drops.  So working people are going to suffer in an inflationary environment.

    Now is the time to raise the capital gains tax from 15% to 20% since assets are probably going to inflate faster than anything else.

  •  A lot of people can't understand this point (2+ / 0-)
    Recommended by:
    basquebob, splashy

    A terrifying number of progressives have bought into the Ron Paul gold buggery theory that central banks are bad and that the entire global economy should be reduced to a size that can be represented and financed by a global pile of relatively useless yellow metal about the size of a large suburban house.

    •  Central Banks are bad when their work solely (1+ / 0-)
      Recommended by:

      benefits the minority at the top of the fiscal food chain.  Absent the political spines in Congress to enact a "real" jobs/infrastructure spending bill, what Bernanke finally has done is as good as can be expected.

      -8.88, -7.77 Social Security as is will be solvent until 2037, and the measures required to extend solvency beyond that are minor. -- Joe Conanson

      by wordene on Mon Sep 17, 2012 at 11:46:44 AM PDT

      [ Parent ]

      •  If that were true it would be valid (2+ / 0-)
        Recommended by:
        basquebob, splashy

        But the Fed of the US -- the US central bank -- announced that it's main goal in increasing employment.  Since Congress wouldn't enact a real jobs infrastructure bill, how is it bad that Bernanke decided to do everything in his power to increase employment?

        I get your point -- you agree with the diarist.  He's doing the best he can.  But what amazes me is the demonization of the only tool for the 99% that exists as long as the Republicans have (or had) the House.

    •  No. (2+ / 0-)
      Recommended by:
      wordene, splashy

      A "terrifying number of progressives?" You'll have to back up that inane statement with something more than bald faced assertion. Gold buggery is a libertarian thing, not a progressive one. What most progressives want is a national bank that is simply a democratically controlled credit union owned by the citizens.

  •  Economy (0+ / 0-)

    When the ruling class decided to force jobs out of the USA to the benefit of a few rich plutocrats and their Koch sucking politician slaves the economy was gradually destroyed. The numbers were adjusted to announce success repeatedly in the midst of ever deepening failure. There is no inflation - even though prices go up. There is low unemployment because only enough unemployed people are counted to get a number they seem to get away with if it is repeated enough. We have no money for infrastructure, social programs and education but there is no limit to bank bailouts and war spending because it would be a terminal disaster if we didn't spend more than 6 times the next spender on war (CHINA) or if one big mismanaged bank was taken over busted up and the management fired. The economy would be devastated if regular people could get the kind of bankruptcy deals corporations get. Labeling food with contents and production practices just can't be done on labels that have NEW, IMPROVED, and large pictures that trick people into buying crap plastered all over them. People are stupid, but not as stupid as the plutocrats and their useful idiots in politics think we are.  

  •  Thanks for spreading "just dictatorship" meme (0+ / 0-)

    Hey, we should all be thankful we don't control our own central bank. We'd only screw it up. It sure is a good thing that our central banking system is owned and controlled by private industry!

    I say, let's take this to it's logical conclusion: as Homer Simpson said, "When are people going to learn, democracy doesn't work!" We need some sort of king or emperor to make all our decisions for us.

    Seeing one tiny inkling of concern for the unemployment rate coming from the fed is too little, too late, not something to celebrate.

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