Jacob Heilbrunn

Don't Bash the Fed

Distrust of establishment institutions is the distinguishing characteristic of modern America. One institution after another--Enron, Lehmann Brothers, FEMA--has proved to be either incompetent or corrupt or both. Now the Federal Reserve is coming under fire.

For decades a small group of conservatives, led by Ron Paul, has viewed the Fed with suspicion. The founding of the Fed led to conspiracy theories that Jewish bankers were behind its establishment in 1913, a view propagated in books such as Eustace Mullins' Secrets of the Federal Reserve. Paul's opposition to the Fed is based on a more traditional fear of hyper-inflation and of central banks. In Paul's case it is rooted in a study of the Austrian school of economics.

Lately, more mainstream economists and politicians on the conservative side have been targeting the Fed. Until recently, the criticism of the Fed came mainly from the left, which has traditionally complained the the Fed is the servant of Wall Street--too interested in holding down inflation and not doing enough to stimulate the economy. The complaint from conservatives is the reverse.

Today's Wall Street Journal thus examines the mounting anger at the Fed. The Journal observes,

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

"The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.

Too much, however, is being made of the Fed's plan to engage in what it calls "quantitative easing." In the absence of any sound fiscal policy, Fed chairman Ben Bernanke has no choice but to try and intervene to bolster the economy. The crocodile tears from China and Germany, particularly Herr Wolfgang Schauble, are risible. Germany has been relying on exports to boost its economy, like China. Both countries are pursuing a beggar-thy-neighbor policy. The idea that Bernanke is engaged in something nefarious by further driving down the value of the dollar doesn't hold water. As former vice chairman of the Fed, Alan Blinder, observes, "to create the fearsome inflation rates envisioned by the more hysterical critics, the Fed would have to be incredibly incompetent, which it is not."

Apprehension over the effects of further stimulating the economy is understandable. But the risks of inflation appear to be almost nil. So far, Bernanke, not his critics, seems to have it right. Assailing the Fed may be emotionally satisfying, but it is dangerous political territory to enter.