Recently, newly official Presidential candidate Rick Perry suggested that it would be "treasonous" for Ben Bernanke and the Federal Reserve to "print more money" in order to play politics. If you want the political dogfight over the comments, check your regular media outlet. However, the comments highlight a fundamental misunderstanding that most Americans have about the Federal Reserve Board and its power over the U.S. economy.
Before we get into that, however, it seems that there is a glaring lack of logic in both Mr. Perry’s comments and the media reaction to them. If the Fed can fix the economy to such an extent that the recovery might alter the outcome of the election, whenever it chooses to do so, wouldn’t it be more treasonous to not be doing it right now, or say, six months ago?
In other words, if just turning on the printing presses would make a meaningful improvement to the economy, shouldn’t (wouldn’t) they be doing it right now instead of letting the U.S. economy stall, its citizens suffer and allowing other countries to gain strength at America’s expense?
The Fed’s Real Power
The truth is that "printing money" or other fiscal stimulus can only accomplish so much. The Fed’s target interest rate has essentially been zero percent for a long time now, and the economy is not racing ahead while President Obama builds double-digit leads in the polls. In other words, the Fed has already tried printing money and while it may have lessened the economy’s slide into a second recession (so far) it has not kicked the economic afterburners in.
Theoretically, the Fed could take the gloves off and pull some massive levers that would provide a short-term, temporary improvement to the economy, but doing so would inevitably cause painful repercussions in the near future. Any trained economist knows this, and that is why Fed actions, are always muted. Things occasionally seem drastic, but only when compared to previous Fed actions.
These small actions are designed to help the economy, or control inflation, by nudging things in one direction or the other. It is a tricky game to play. If the moves are wrong, things can spiral out of control quickly and the actions necessary to bring things back in line become even trickier.
During Greenspan’s Fed years, he repeatedly tried to nudge some wind out of the sails of a stock market that he said was plagued with "irrational exuberance." It didn’t work. Wall Street bankers and Main Street investors continued to pour money into an inflating bubble thanks to cheerleaders like Goldman’s Abbey Joseph Cohen who shot to fame by always being "right" about the direction of the bubble market, at least until it stopped going up, since that is the only prediction she ever made.
When the Fed finally raised interest rates in a significant manner, its goal was to rein in inflation. However, the outcome was a nasty recession and a stock market crash. There is no doubt that neither was intended by the Federal Reserve Board.
At the end of the day, any reasonable use of Fed power, politically motivated or not, is but one of many factors pushing the U.S. economy around.
The Fed and Politics
Historically, the Fed has played politics consistently in one way. The Fed tries to never raise rates going into the Christmas holiday season. Smashing consumer spending before the biggest quarter of the year for any retailer or triggering layoffs during the holidays are the last thing anyone wants.
Understand this, Bernanke has already tried most of the tricks he has. If things start heading from blah to AGGHHHH, chances are he’ll try something again, and when he does, that will be a good thing, no matter who gets to take the credit (or blame) as President in a couple of years.