Members of the Federal Reserve’s Open Market Committee woke up earlier this week to find a dead fish placed on the steps of the Marriner Eccles building in Washington. Everyone knows this is a traditional Mafioso warning to the recipient that they are soon to be “sleeping with the fishes”. But who would have the audacity to so-crudely threaten the distinguished and eminent governors and presidents of the Federal Reserve System? How about those masters of intimidation and economic terrorism, the Republican Leadership in Congress.
Yes, the warning came collectively from Mitch McConnell, Jon Kyl, John Boehner, and Eric Cantor, in the form of a letter to Fed Chairman Ben Bernanke ordering him not to institute any more monetary easing. The timing was exquisitely deliberate: a day before the FOMC was due to meet to discuss monetary policy and – according to many insider reports – vote to approve some new form of Quantitative Easing.
The letter didn’t exactly say that if the Fed voted for more monetary stimulus the august members of the FOMC would find cement blocks placed around their feet, but it didn’t need to. These are the same Republican leaders who just recently threatened to throw the United States into default if they didn’t get their way. They’ve already got cement blocks placed around the feet of Barack Obama, so they’ve certainly established their bona fides for murderous thuggery.
The letter does make the valid point that the previous two rounds of Quantitative Easing have failed, and in fact caused more uncertainty on the inflationary front than otherwise. If the writers had then gone on to decry the effect this inflationary surge has had on the average American, you would almost believe the Republicans were slightly sympathetic to the economic pain people are feeling in this depression. But the letter makes no such allusion, because the Republicans aren’t interested in the economic welfare of the average American. In fact, they want more economic pain inflicted on the American people – just enough to force them to vote out that Democrat in the White House in 2012.
This is, after all, the publicly stated policy of the Republican Party, as enunciated by Sen. Mitch McConnell immediately after Barack Obama’s election. All else stands subordinate to this goal, though taking over the Senate is a close second in importance. The letter sent this week from the Republican Leadership may be couched in economic language, but it is as nakedly political a document as we are likely ever to see in Washington.
Experienced Fed watchers are describing this threat as unprecedented, which may be true looking back over nearly a century of history for a central bank which cultivated and prided itself on its independence and ability to stay above the political fray. Those days are gone. Fed Chairman Ben Bernanke is already under a death threat from Gov. Rick Perry, the front-runner for the Republican nomination for president, who accused Bernanke of “treason” if he dared to interfere in Perry’s road to the White House by establishing any more Quantitative Easing. Do you think Ben Bernanke is going to give a rousing talk of encouragement to his FOMC colleagues so they will approve another half a trillion dollars or so of Quantitative Easing added to the Fed balance sheet?
Not very likely. Not when every member of the committee has a copy of the Republican Leadership letter in their folder before them, and the smell of rotten fish permeates the board room. Miracles do happen, and it is theoretically possible that the FOMC will come storming out of the building with a massive QE3 program in place, ready to take one last suicidal stand for Federal Reserve independence. More likely, the FOMC is going to approve this afternoon some whisper of a change to policy – something like lowering reserve requirements on banks to near zero percent, or shifting their balance sheet holdings to later-maturity instruments, in the form of Operation Twist. Just the sort of things that are relatively meaningless to the economy, and won’t prevent the deflationary tidal wave from reaching our shores, but will allow the Federal Reserve to dress itself in a fig leaf of independence.
The market may get excited with this new form of monetary stimulus, but it will only be temporary. In a short matter of time the market will understand the Fed is finished – washed up – neutered and out of the monetary stimulus game altogether until a new president comes along in 2012 and decides to let them out of their marble cage on L Street. But for that to happen, they will have to be on their best behavior. If there is going to be any more monetary stimulus, it is going to be designed to do the one thing Messrs. McConnell, Kyl, Boehner, and Cantor deem vastly more important than helping Americans in economic distress – helping Republicans obtain and keep power.