May the Fed Be With You

Help us Ben Bernanke, you're our only hope.

Up until the mid-aughts, I didn't know specifically what the Federal Reserve did. For much of my young adult years, my only point of reference was every few months this mysterious Merlin-like Chairman Alan Greenspan would go before Congress and tell them that he was lowering interest rates again and that we needed to reduce the deficit, yadda, yadda, yadda, Charlie Brown's teacher's voice. Whatever, dude, leave me be while I try to get in on this great Pets.com investment.

As I've learned, over the years the Federal Reserve is our Central Bank and they are in charge of setting monetary policy and controlling the money supply. So that means they adjust interest rates and/or pull out or pump more dollars into the economy as they see fit.

Matt Yglesias has posted about this quite a bit recently, so I recommend you check out this, this, this, and this for more background. Here's a key passage [bold mine]:

In translating their ideas to the activist audience at Netroots, [Paul] Krugman and others tend to skip over the fact that monetary stimulus from the Fed is pretty clearly necessary. Just ask yourself what the world would look like if some optimal fiscal policy were enacted and growth accelerated to the point at which we were adding 300,000-400,000 jobs a month instead of 100,000-200,000 jobs.

Well, millions of new workers would start burning gasoline and commuting to their new jobs. Millions of Americans would start moving out of their mom’s basement or their sister’s spare room to rent their own place. They’ll be running their own heaters and air conditioners. They might eat out a bit more often, and cook a bit less rice and beans and a bit more meat.

Those are all good things—but would mean higher prices.

There’s plenty of slack and idle resources in the economy, but we don’t have vast tankers of unemployed gasoline and the supply of rental housing is pretty low. In my opinion, a temporary price surge would be a small cost for a return to full employment. Or to put it another way, keeping the country on track for a years-long spell of mass unemployment is a shockingly stupid and immoral way to ensure cheap gasoline and affordable bacon.

So to recap, since the 2009 American Recovery and Reinvestment Act (ARRA, aka "the Stimulus"), Congress has been unwilling to provide more stimulus for the economy, other than smaller-scale things that are as popular to everyone as ice cream on a summer day, like the payroll tax cut. Unfortunately, the payroll tax cut was already included in the original ARRA, so extending it every year, doesn't really provide additional stimulus, it just continues current policy, as did the 2-year extension of the Bush tax cuts. The cautious approach signaled that Washington just wanted to keep the economy from falling off a cliff, while hoping for a more robust private sector recovery at some point. And we're still waiting. The Fed unfortunately has taken the same approach thus far.

When Congress is unwilling to act, it's the Federal Reserve's duty to provide needed stimulus. The Federal Reserve's job is NOT to prevent inflation from rising, it's to adjust monetary policy with the goal of creating full employment. So when Congress is not acting, the Fed make adjustments. For the Fed to stand by and do nothing, it means they are implicitly saying that 8+% unemployment is totally acceptable.

Somewhere in the neighborhood of $2B will likely be spent on this Presidential campaign before it's all said and done. But the political futures of Barack Obama and Mitt Romney are much more dependent on the actions of Ben Bernanke in the coming months, than on whatever that money buys them.