Scott Sumner and David Glasner have new posts (links in blog roll) that discuss the op-ed by James Bullard, President of the St. Louis Fed, that was published in today’s (9/20/12) Financial Times. In that piece, Mr. Bullard argues that the economy can recover from the shock it experienced in 2008-9 on its own, thus he does not support the recent decision by the FOMC to conduct QE3. Both Mr. Sumner and Mr. Glasner go over the details of the economics far better than I could ever hope to accomplish on my own, so I won’t be covering that here. What I want to do here is some speculating about what might be happening behind the scenes, about the reason why Bullard might be so vocal about his opposition.
Back in 2010, Bullard published a paper titled The Seven Faces of the Peril. In that paper he goes over some basic facts of the cause of the recession, which seemed to me that he recognized the problem, only put in Fed jargon. The primary thrust of the paper was a warning that we don’t want to end up like Japan. He was critical of how the problem was being handled and suggested that a different kind of QE would be better than what was then being done with MBS, due to lack of it being well understood by the public, and that simply extending interest rate guidance wasn’t doing anything useful. To summarize, I don’t believe he believes a word of his op-ed as it contradicts his own scholarship.
I suspect that there is real blood in the water concerning the Federal Reserve that is likely coming from all directions and Bullard is either placing a put on Republicans winning the election or he is trying personal damage control. It’s hard to tell which might be the case, but I doubt that his opposition is because he believes anything he wrote in his opinion piece.
Marcus Nunes has a post showing the major central banks of the world all tightening at the same time, and it might be just a coincidental failure of orthodox theories that are the basis of the world monetary system, or it possibly could have been that there was some collaboration to adjust policy to certain criteria by a deadline among the central banks. Regardless of the cause, it appears to have been politically damaging to the Federal Reserve for the institution as a whole to cling to policies that were obviously failing and for Bernanke himself to decline to the role of economic leadership. Bernanke might believe that the less he says the better, but I don’t believe that to be the case. Someone needs to lead on this issue rather than being shrinking violets or the next election could certainly seal our economic doom. The clock is ticking.
Now, it seems that the best defense is a good offense. If Bernanke is interested in the survival of the Fed as we know it, concerned about what the economic future of the country will be like, and wants to get his colleagues on his side in public as well as in private, he needs to expeditiously come clean about the entire ordeal and why QE is the only way out in a very public way. Some people will never believe a word he says, but I think that the many, many more who aren’t radicalized against the Fed will listen. It can’t be an easy thing to do, but it is a necessary thing to do in order to help repair the damage and educate about the importance of the recent policy change. There still might be some legislative changes to the Fed in the future, but if he does this one thing, it will help prevent the political system from foisting serious economic damage on posterity.