Federal Judiciary

The Preemptive Scapegoat -- By: Kevin Williamson

A few of the old progressives, believing that America?s real enemy was Joe McCarthy and not Joe Stalin, would protest that they were not pro-Communist, but anti-anti-Communist, if anti-Communist meant Richard Nixon and Whittaker Chambers and such. There was much dishonesty wrapped within that argument, but there was something to it. Borrowing the form, one might argue that those on the right who are sympathetic to besieged Fed chairman Ben Bernanke are not so much pro-Bernanke as anti-anti-Bernanke.
 
The estimable Larry Kudlow sometimes rides with the anti-Bernanke posse, and he has suggested that Helicopter Ben should consider withdrawing himself from consideration for a new term at the Fed -- a term that many or most Republican senators would vote to deny him. Kudlow probably is right on the economics -- Bernanke remains haunted by deflation, while the beastly mark of inflation already is faintly visible upon the forehead of the economy -- but, as a purely prudential matter, Kudlow & Co. should remind themselves that the president of the United States of America is Barack Obama, and they should ask themselves if they feel comforted by this roster: Anita Dunn, Van Jones, Carol Browner. President Obama may not be every inch the radical left-wing ideologue of conservative anxiety, but he does seem to enjoy surrounding himself with them. You don?t get an Anita Dunn or a Van Jones in the government by accident. You don?t get Sonia Sotomayor on the Supreme Court by bad luck. When he is not courting ideologues, the president prefers to select knuckle-dragging enforcers (Rahm Emanuel) or yes-men (Joe Biden, Tim Geithner). President Obama has made some reasonable choices in filling key economics posts, but it is difficult to imagine that any Fed selection he might make would constitute an improvement on Bernanke, given the foaming anti-Wall Street sentiment animating his party and the foundering of his key domestic initiatives.
 
President Obama is more than capable of appointing a Paul Krugman type, if not Professor Krugman himself, to the Fed. And that prospect should be worrisome indeed to the anti-Bernankeists, inasmuch as the Economic Gospel According to Paul calls for the Fed to more or less ignore clear and present inflation threats and to act, instead, as a Department of Permanent Stimulus, circumventing Congress?s refusal (so far) to unleash another cataract of pump-priming appropriations. Writes Krugman: ?Someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve.#...#While economic analysis says that we should have a large second stimulus, the political reality is that the president#...#probably can?t get enough votes in Congress to do more than tinker at the edges of the employment problem. The Fed, however, can do more.? How much more? Krugman calls for the Fed to buy $2 trillion worth of assets to grease the credit markets. This, he argues, would have ?hardly any downside.? If Bernanke?s critics worry that he is excessively dovish on inflation, consider the likely alternatives. A full-fledged Obama guy at the Fed could do a heck of a lot more than ?tinker at the edges.? 
 
Kudlow and his fellow right-wing anti-Bernankeists are substantive critics, and their arguments must be taken seriously. Much of the criticism Bernanke has weathered in Congress is of a less serious sort. In effect, Bernanke is being preemptively scapegoated by members of both parties in anticipation of economic pain almost certain to be felt in the first two quarters of 2010. It is not entirely unfair that Bernanke?s bearded and scholarly countenance has been made the face of Bailout Nation, but it is worth remembering that TARP and much of what followed it was a bipartisan effort with broad support. Congress was bipartisan in coming together to bail out the banks, and its members are bipartisan in their flight from responsibility for having done so. Nobody wants the blame for those excruciatingly unpopular bailouts, but everybody claims credit for the period of relative calm they produced. Barack Obama, engaging in accounting chicanery that would make Charles Ponzi himself blush, credits himself for the successful interventions instituted under George W. Bush but faults President Bush for deficits incurred under President Obama and a Democratic Congress. To the extent that he is getting away with it politically, that is a bad sign for our nation, as is the new bipartisan taste for interfering with the Fed?s independence. As the bailouts? chief engineer, Bernanke has a permanent target embroidered on the seat of his pants. But he is more likely to resist the politicization of the Fed than would a replacement selected by President Obama. 
 

Regardless of its leadership, the Fed faces a dilemma: Nobody really knows what to do about interest rates. If there were a precise mathematical formula for determining what interest rates ought to be, and a practicable way of feeding all the relevant variables into it, it would be applied as routinely as mathematical formulas are used to coordinate artillery fire. But just as the government cannot accurately price milk or gasoline in the absence of a market, the Fed cannot put a real price on dollars or on credit. The Fed operates by trial and error. (Mostly error, its critics would say.) So, going into 2010, should the Fed cut rates, maintain them, or raise them? At least the first option is off the table: With rates essentially at zero, cutting is not an option. Maintaining rates near zero has its hazards, too: With the banks able to borrow at essentially no cost, they have great incentive to recycle federal money by investing in Treasury bonds, borrowing the government?s money for next to nothing and lending it back to Washington at a higher rate. Free money produces inflation pressures as well, thereby undermining the strength of the dollar. Most critical, it also suggests a contagious lack of confidence in the economy; our current economic straits are as much a credibility deficit as a capital deficit. 
 
What about raising rates? That is most likely to happen, although when and by how much cannot be known. (The Wall Street Journal reports, drily, that Bernanke recently refinanced his own mortgage, locking in those sweet low rates. The Fed chairman had put 10 percent down and later took out a second mortgage on a Washington home he bought for $839,000 in 2004, meaning that he?s probably underwater on his house. Make of that what you will.) Raising rates has its perils: Rising interest rates were the trigger (though not the cause) of the housing meltdown, and higher interest rates in the near future will make mortgages more expensive, kicking the housing market while it?s down. On top of that, steeper interest rates mean higher monthly payments for variable-rate mortgages when they reset; if payments go up and house prices decline, that almost certainly will mean more mortgage defaults and consequent stress in the market for mortgage-backed securities. The Fed itself already has nearly a trillion dollars? worth of MBS on its balance sheet, which diminishes its capacity to soak up more junk. Hiking interest rates could send the stock market plunging, too. 
 
No matter what the Fed does at its next few meetings, high unemployment is likely to persist for the next couple of quarters at least, if not longer; the dollar is likely to remain weak; and the real-estate market is likely to remain in a slump. Those are not exactly bold contrarian predictions. But, predictable as these trends are, the Obama administration and both parties in Congress are going to be looking for somebody to blame, and they?re already setting up Bernanke to be their whipping boy, the G. William Miller of the 21st century. (Miller?s short-lived Fed chairmanship under Jimmy Carter was blamed for the 14 percent inflation that helped put Ronald Reagan in the White House and ruined the Democrats? economic reputation for a generation.) Ben Bernanke is not indispensable, but he?s what we?ve got, and probably the best we?re going to get for now. The Fed is a flawed institution, but it?s what we?ve got, and probably the best we?re going to get for now. This is not the time for daring experimentation in our national banking practice. And conservatives should remind ourselves that it is the Pelosi-Reid Congress first, and the Obama administration second, that are the most serious threats to our present and future national prosperity. We should not let them use Bernanke to distract the voters? attention, or ours.

--Kevin D. Williamson is deputy managing editor of National Review.

Full post as published by Bench Memos - National Review Online on January 05, 2010 (boomark / email).