Central Banking Premises Are Lacking?
By Staff News & Analysis - October 23, 2012

How Would Mitt Romney Influence the Fed? … Binyamin Applebaum discusses who Mitt Romney would likely tap to replace Ben Bernanke at the Federal Reserve and says we'd likely get either Greg Mankiw or Glenn Hubbard whose views seem similar to Bernanke's or else we'd get John Taylor who seems like more of a hawk. Neil Irwin offered a longer list of contenders at the beginning of the month, but I think also has those three as his leaders. From my viewpoint, one thing I think we've learned over the past five years is two modes of inference that don't hold up. One is "the president is sure to appoint someone who'll deliver strong nominal growth to ensure his re-election" and the other is "new Fed Chairman X is sure to do Y because Y is what he said we should do in his academic work." Unfortunately that leaves the situation inherently murky. – Slate

Dominant Social Theme: "When I use a word, it means just what I choose it to mean, neither more nor less." – Humpty Dumpty

Free-Market Analysis: This article at Slate illustrates the growing radicalization of the Fed conversation and also how words and premises make it increasingly difficult to discuss central banking logically.

It is an analysis of whom Mitt Romney would pick for Fed Chairman if he became president – but the subtext is that the US central bank ought to adopt certain specific targets as related to employment especially.

It is written by Matthew Yglesias, "son of novelists Jose Yglesias, of Cuban and Spanish descent, and Helen Bassine Yglesias, daughter of Jewish Polish immigrants," Wikipedia informs us. "Yglesias went to high school at The Dalton School in New York City and later attended Harvard University where he studied philosophy [and] was editor-in-chief of The Harvard Independent, a weekly newsmagazine."

Yglesias is evidently a liberal who supported the Iraq war and reportedly voted previously for Mitt Romney. He has also written for the American Prospect and for The Atlantic magazine before taking up his post at Slate.

As might be expected given his progressive credentials, this article is a subdued argument for yet more central banking activism, which Yglesias refers to as "regime change." He's a bit coy about it but he seems to be arguing for greatly stepped up stimulation to cure the US "employment" problem. This is part of a larger argument that is gathering strength regarding Fed policy: that it is too timid.

The logic is that whatever the Fed has been doing (printing money) hasn't worked very well and therefore the Fed ought to do MORE of it. Of course, free-market oriented types believe the problem is that the Fed is already doing too much. But this is obviously not the perspective of Fed activists.

Additionally, such individuals often want the Fed to be clearer about its goals. They want the Fed to adopt numerical goals, in fact, and work toward meeting those goals by manipulating monetary volume.

Those around the Fed have been reluctant to adopt formal goals because of the dual mandate to control "inflation" (really, price inflation) while supporting "employment." Within a larger context, the US central banking brain trust has been reluctant to take the step toward numerical goals because the Fed is traditionally (and once again) a target of US populist resentment.

To announce that the Fed – a purposefully ruinous instrument of elite policy in many eyes – will now seek to mimic various scientific disciplines is akin to attaching a bullseye to its metaphorical back. Here's a little more from the article:

Rather than focus on individuals, lets look at what's promising and what's not promising about a Romney influence on monetary policy.

The promising element is that when Rick Perry, Ron Paul, Herman Cain and others were leading the GOP down the path of hard money mania, Romney was clearly reluctant to follow. He did notably little Bernanke-bashing and even appeared to defend him at times. So Romney has a foot in the camp of good sense and also perhaps has a grasp of the importance of this issue, making a topic he didn't want to immediately flip-flop on when opportune.

The non-promising element is that we're in the era of the "partisan presidency." A Democratic White House is staffed by Democratic Party bigshots and a GOP White House is staffed by GOP bigshots.

And there's no doubt that the prevailing winds in the GOP are toward hard money. Paul Ryan is passionate about monetary policy and is committed to hard money views he learned from Atlas Shrugged. The new conservative think tank E21 is a bastion of hard money thinking and Senator Robert Corker and other Republican members of congress have rallied to urge the Federal Reserve to care even less about unemployment and real output.

The salient point of this article is to suggest that Romney would choose a "hard money" chairman – and this would further separate the Fed from the laudable effort (in the eyes of some) of becoming more scientific and goal oriented. Of course, one must put "hard money" into context in order to discuss this suggestion logically.

The dollar is not backed by anything specifically and on top of that the world's largest oil producer, Saudi Arabia, demands payment for oil in dollars, forcing other countries to hold dollars. This has allowed the US Fed, with the connivance of Congress, to spend trillions more than the US could otherwise afford. Countries are forced to buy these dollars even if they don't want to.

At this point it is obvious that people would not hold dollars if they did not have to do so. The dollar is seen as a degrading investment. There are too many of them. For this reason among others it is strange to refer to certain Fed-centric economists as "hard dollar." A hard dollar viewpoint is one that espouses commodity backing for the currency, even full-reserve backing. To speak of those espousing fiat of any kind as hard dollar is surely to misuse the term.

What is meant by the term "hard dollar" is that those to whom the term is applied are in favor of FEWER soft dollars – fiat dollars. But to apply the term "hard dollar" to these folks is surely a misuse of the term.

"What we need is regime change," the author writes. But what is actually needed is a clarification of what is logical from a monetary standpoint.

After Thoughts

We are told on good authority to check our premises because premises color conclusions. This article is a good example of how debasement of the fiscal conversation has made it difficult even to discuss necessary remedies.

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