Federal Reserve Chairman Ben Bernanke spoke in Indianapolis on Oct. 1, and I was lucky enough to sit with a group of smart folks during his talk. I found three elements particularly interesting.
First, Bernanke does not believe we are in a recession. While I—and a growing number of my colleagues—think we are either in or at the cusp of one, the more relevant point is that the current level of economic growth is slow enough to make us worse off, not better.
Bernanke also defended current and past Fed actions, especially the decision to keep interest rates low and money supply high while unemployment rates and a general economic slowdown threatened.
And he defended some policy innovations (QE3 and Operation Twist). The details are too long for this column, but suffice it to say Bernanke reiterated that monetary policy was not a panacea for our economic woes. He singled out our unsustainable public debt, a poor tax code and educational issues as areas for which more long-term focus was needed.
Interestingly, Bernanke was asked whether his well-known fondness for baseball held lessons for economic policy. He pointed to the long-term focus of the Washington Nationals as an example of a successful strategy. Good stuff.
The real reason for his visit (as if one really needs an excuse to visit Indiana in early autumn) was to better explain the role our central bank plays in our economy. This should hardly be needed, but there is more than a fair bit of mindless antipathy toward the Federal Reserve in this electoral season.
On the left, we hear the Fed is a servant to moneyed interests and must be ended. On the right, we hear the Fed should be closed in favor of the gold standard. Both positions have a long way to go before they could be labeled as naive.
The Federal Reserve system, like the Congress that sets its mandates and the electorate itself, is imperfect. There is much to criticize in the Fed’s actions, but, when laid against the likes of Congress or the Illinois Legislature, the Fed looks like a saint. To abolish it requires a belief that its replacement would be an angel.
In abolishing the Fed, we would leave the potent tools of monetary policy to the president—there is no other option. Either the president controls monetary policy directly, or he controls the gold standard indirectly.
While one might wish to give a president monetary policy tools, it is useful to remember this would place more power in the U.S. presidency than any since Lincoln. To suppose that we could craft a gold standard that would be immune from manipulation is, again, folly.
We live in a world where human beings, not angels, make decisions about fiscal and monetary policy. It is best to stick with the least imperfect of human institutions.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.