Well, finally someone at the Wall Street Journal (George Melloan, “The Fed’s Asset-Inflation Machine,” 2/7/13) has articulated publicly the shadowy truth about those who set or execute our monetary policy: Alan Greenspan was smart but not strong; Ben Bernanke is neither smart nor strong.
Mr. Melloan indicates that Greenspan saw where easy money and the merging of investment banking and commercial banking were heading, but he failed to prevent the inevitable disaster. (Melloan declines to add that President Reagan might have dumped Paul Volcker and replaced him with Greenspan in 1987 precisely because he saw in Greenspan the exact blend of intelligence and weakness that the President wanted: a chairman who would attempt to keep the dollar strong but would allow the re-leveraging of Wall Street.)
Bernanke, on the other hand, seems oblivious to monetary history and confident that some level of additional trillions of borrowed or printed dollars will eventually, magically, produce the economic growth that the first six trillion did not. (Melloan declines to add that Bernanke, in his enabling of the Obama agenda, also seems oblivious to the possibility that he is being played by a President who doesn’t necessarily buy the pseudo-Keynesian growth-theory but is concerned solely with political considerations.)
As Melloan suggests, Mr. Obama’s fiscal, monetary, and regulatory policies have created a dilemma:
- Putting aside the Keynesian fantasies that there is some level of additional “stimulus” spending that would finally ignite a recovery, the only way to escape from our economic doldrums would involve, among other things, a Volcker/Reagan-style policy of causing/allowing interest rates to rise until the various financial bubbles burst, interest rates fell, and growth finally resumed. That policy could be political suicide because of the temporary hardships it would cause; the Reagan recovery barely kicked-in in time for him to win re-election in the 1984 election, after some very difficult years.
- On the other hand, the longer we keep interest rates low, while the deficits continue and the national debt mounts and the bubbles get bigger, the worse the pain when the rates are finally allowed to rise to more natural levels. Not only that, if somehow the Keynesian format actually worked, the first sign would be inflation, in which case the Fed would have to jack up the rates quickly.
In other words, lose BIG now, or lose EVEN BIGGER later. Doesn’t the President get this? Isn’t his presidency doomed either way? Shouldn’t he be as concerned with promptly getting his fiscal and monetary policies right as he is with continuing his expansion of the welfare state and his transformation of our form of government? Not necessarily. What if the President (including the Chicago Gang and the rest of his REAL cabinet) has a different plan?
I believe he does, and that the Plan is this: all he wants to do is get through the 2014 elections with no significant change – up or down – in the condition of our national economy. If, through success in the 2014 elections (and maybe the bonus of the departure of one of the conservative Supreme Court Justices), the President’s party finally had the entire federal government by the throat, the President would then be free to take the Reagan/Volcker-type actions to stop the monetary (and fiscal) madness, or, if he preferred, to double-down on the Keynesian approach, regardless, in either case, of negative political consequences
Both approaches – the Keynesian and the Reaganite – involve rising interest rates: the Reagan approach raises them up-front; the Keynesian approach necessitates their eventual increase in order to contain the inflation that is the first symptom of the success of that approach. Rising interest rates cause pain for everyone other than bankers. Because of the Obama/Bernanke fiscal and monetary policies, we are already at the razor’s edge with inflation, and any kind of a decent recovery will drop the razor right on the neck of most individuals and businesses. Thus Obama is as threatened by the possibility of a quick recovery as he is by the possibility of an early lapse back into recession; either could cost his party the 2014 elections.
In other words, the President is not just worried about another recession. The President cannot afford a quick recovery, regardless of whether caused by the Keynesian techniques or the Reagan/Volcker approach. His real agenda may well be to keep the economy in “neutral” through November 2014, stalled between recession and recovery, and Mr. Bernanke, imagining that he is plotting the path toward growth, has already pledged to provide exactly that.
After the 2014 elections, Mr. Obama could do as he likes: continue to pursue Keynesian dreams, or install a competent Fed chairman and restore economic growth through tight money and low tax rates, with or without Chinese-style “state capitalism.”