How Republicans Learned to Despise the Fed

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They hate you, Ben Bernanke Photo: Chip Somodevilla/Getty Images

The letter sent Tuesday night from the congressional leadership to the Federal Reserve, urging no further action to reduce unemployment, is the sort of thing nobody could have fathomed a decade ago. It is, above all, a triumph of either cynicism or self-delusion. As Stan Collender puts it, “now that the GOP has made it all but impossible for fiscal policy to be used to improve the economy, they want to make sure that the only other tool the government has at its disposal — monetary policy — isn't used either.” Republicans might say, or have persuaded themselves, that they are acting in the public-spirited interest of preventing long-term deficits or inflation. But the last time a Republican held the White House (and bore the brunt of economic pain), they favored both fiscal stimulus and looser money.

The Republican letter claims that any reduction in interest rates would “harm the U.S. economy.” The trade-off in monetary policy is that faster growth could lead to higher inflation. Given rock-bottom inflation and sky-high unemployment, opting for growth right now seems like a no-brainer, but I concede that there is at least some theoretical, long-term inflation risk. The GOP's claim that reducing interest rates could harm short-term economic growth is silly.

What gives the game away is Rick Perry’s famous prediction of Texas justice against Fed Chairman Ben Bernanke. Perry’s mafia-esque quasi-threat grabbed all the attention, but it’s worth recalling that Perry specifically directed his ire at the prospect that Bernanke would loosen money and therefore boost economic growth before the election, creating jobs for many Americans but possibly costing Perry one in Washington.

The more amazing turnabout is that the GOP has embraced what used to be called, dismissively, “Fed bashing.” The tradition of Fed bashing existed even before there was a Fed — recall William Jennings Bryan decrying the gold standard. But, at least in recent history, it was liberal Democrats who attacked the Fed for caring more about low inflation than low unemployment. In 1982, Democratic House Majority Leader James Wright called for the resignation of inflation-slaying, recession-causing Fed Chairman Paul Volcker. Left-wing author William Greider wrote Secrets of the Temple, an 800-page treatise on the Fed’s slavish fealty to the ideology of inflation-hating rentiers over the interests of hard-pressed common folk. The Federal Reserve was considered a conservative institution.

As the nineties economic expansion proceeded, the Democratic Party increasingly came to view “Fed bashing” as a disreputable form of populism. The leaders of the Party were sophisticated folk who prided themselves on their willingness to refrain from ever criticizing the Fed. A 1999 Washington Post encomium to Robert Rubin described the outgoing Treasury Secretary, saying his key triumphs included refusing to “bash Greenspan and the Fed when they raised interest rates.” The ethos translated to both parties. A 1999 editorial in the conservative Washington Times warned, “Several Republican presidential candidates are playing a dangerous game of Fed-bashing.” That “dangerous game” consisted of such mild utterances as Steve Forbes's claim, on the hustings in Iowa, that “interest rates are too high and while Alan Greenspan and the Federal Reserve raise rates, commodity prices have plummeted.” This is what, at the time, passed for dangerous populist rhetoric.

Over time, Chairman Alan Greenspan attained a political and cultural prestige that’s hard to fathom today. Not only did nobody in Congress question his decisions on monetary policy, they allowed — nay, begged — him to lecture them on policy matters that lay entirely outside his purview. Greenspan was typically obtuse, but this only gave his words more power — after his testimony, each party would sift through the verbiage for nuggets of evidence that the mighty maestro had endorsed their position. Democrats and Republicans were like children, arguing over which one Daddy Alan loved more.

The absurd groveling obviously reflected, above all, the economic boom and the widespread if largely ill-informed belief that Greenspan had orchestrated it. And yet, to some degree, the bi-partisan ethos of Fed deference carried over into the aughts even as prosperity didn’t. But the economic crisis finally erased the last vestiges of the Greenspan halo. Meanwhile, Republicans opportunistically grasped onto previously marginal hard-money doctrines of cranks like Ron Paul — which, not coincidentally, gave them cover to choke off the last avenue of economic recovery, in turn offering them their best chance to return to power.

It is probably for the best that members of Congress no longer throw themselves before the feet of the Federal Reserve chairman. But something short of Perry-esque goonery, or even Boehner-esque mindless opposition, would be a nice middle ground.