Monetary policy debate heats up with unintentional comedy

Ron Paul was considered a crank for talking about monetary policy, even in 2008 and into 2009. What a difference a year makes. Now, monetary policy has become a major subject of debate and the leading Republicans have issued rebukes to the Federal Reserve. Of course, one of The Prechter Predictions is that the Federal Reserve will be discredited and abolished. Although too early to call it a correct prediction, note that Prechter issued that prediction in 2003. If this was a momentum trade, Prechter's prediction is definitely looking like a good bet.

While the GOP was opening attacks on the Fed, it's taken a little longer for the left to return fire. The left is naturally inclined to be against Wall Street, but whenever the left is in office, all but the dedicated grassroots abandon principle for power. (Republicans are not much better, but they don't have the same naked pursuit and use of power, see The Lightworker wants to touch your junk) Therefore, I'd say we are now within sight of the discrediting and possibly abolition of the Federal Reserve, because I can use basic political analysis to predict a bad outcome. The natural allies of the financial system are turning against it, while it's natural enemies are defending it. When you've lost your "base" and rely on fair weather friends, the end is in sight.

We can also see that the left is not mounting much of a defense at all. In GOP to jobless: Drop dead
The first efforts to turn Ben Bernanke into a modern day William Jennings Bryan came from those giants of economic thinking, Rush Limbaugh and Sarah Palin. A few days later the mantle was taken up by a group of Republican economists and policy wonks who gathered at the University of Pennsylvania Club in Manhattan to craft a public letter criticizing the Fed.

Then last weekend at the Group of 20 meeting in Seoul, the Republican campaign for "hard money" received aid and comfort from foreign leaders concerned that quantitative easing might substitute American jobs for Chinese and German ones. Also jumping on the bandwagon was Robert Zoellick, the American president of the World Bank, who no doubt hoped to boost his prospects as the next Republican Treasury Secretary by floating the idea of a partial return to the gold standard.

Finally Tuesday, Rep. Mike Pence, the third-ranking Republican in the House, and Sen. Bob Corker, an influential Republican on the Senate Banking Committee, announced a proposal to strip the Fed of its "dual mandate" that would have the central bank focus solely on ensuring price stability without the distraction of also worrying that 15 million Americans are unemployed and underemployed. "The Fed's dual mandate policy has failed," Pence declared, citing the stubbornly high unemployment rate. It's not exactly clear how unemployed workers would benefit from the Fed's benign neglect.

If you want a serious discussion about changing the structure or mandate of the fire department, the time to have it is not when the entire squad is out fighting a three-alarm blaze. That's exactly the situation with the Federal Reserve and the debate over the dual mandate. Only two weeks after the midterm election, it seems clear that the 2012 campaign has begun. For too many Republicans, the aim is to politicize policy, trash the institutions of government and intimidate anyone who might disagree with their radical ideology.
Invoking WJB "cross of gold" speech to defend the Fed...is ironic. Should the Fed reach the economic credibility of WJB, its fate is sealed.

Elsewhere, the New Republic takes a better stab at the issue, but still manages a howler in Fighting the Fed: Sarah Palin is leading conservatives' most sinister campaign to date. The author talks about the divide between the Palin and Paul camps (he dislikes them both) and says, apparently seriously:
The Pauls’ views may be a bit medieval and needlessly cruel—a growing economy requires a growing money supply; relying on gold or silver, as the Pauls propose, would condemn us to periodic deflations and depressions.
A little economic history is in order. While on the gold standard, the money supply was relatively stable (except during periods of increased supply, such as the gold rushes). During a recession, prices would decline. These periodic downturns in the business cycle were termed depressions. After the Great Depression, the term depression fell out of favor and was replaced with the more soothing "recession."

Has the Federal Reserve managed to solve the problem of periodic recessions? And how about the massive deflation started in 2008 and continuing to this day? Is it due to the gold standard? How badly did the Fed screw up if the current economy and deflation is what critics claim as the very worst problem with a gold standard? But he does nail the political situation exactly, in the broad sense that the enemies of the Fed are growing in number and represent a clear and present danger to business as usual:
Don’t get me wrong: I think criticizing the Fed is an entirely healthy thing. I, for one, am sympathetic to the Pauls’ concern that periods of excessively low interest rates can lead to bubbles, and I do worry that quantitative easing may create similar problems. (Though I don’t see many great alternatives.) Likewise, the Fed didn’t exactly cover itself in glory in the run-up to the crisis, and its bailout of AIG was unsavory even to those involved. But what Palin and likeminded politicians are doing now isn’t good-faith criticism. That requires a baseline understanding of what the Fed does, and grappling with it honestly. What’s going on now is a political campaign intended to de-legitimize technocracy. (As exhibit A, I’d direct you to the presence of the esteemed monetary economist William Kristol at the center of the anti-Fed movement.) And it’s reaching further into the government than ever before.
Take one part socionomics and mix in political analysis. Politicians are, for the most part, dedicated to one thing: reelection. They are very rarely leaders and then are even more rarely dedicated to principle. Ron Paul failed to spark a movement until the movement came to him, his dedication to principle outweighed his lack of leadership skills, but paid off in the end.

Suddenly, everyone wants to be like Ron Paul, including neo-conservative weather vanes such as Bill Kristol, who once called Paul a crackpot for favoring a gold standard and holding other views well outside the mainstream of political debate...at the time.

The New Republic author is more right than he knows. The decline in social mood could morph into an attack on all technocracy, in which case the Federal Reserve is just the tip of the iceberg. And if that's the case, the already established and organized movement to abolish the Fed means that a string of anti-technocrat victories will not end with the Federal Reserve, but begin with it.

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