Paul Krugman, Bernie Sanders, and the Fed

February 12, 2016

Paul Krugman used most of his column this morning to take some well-aimed shots at the Republican presidential contenders and congressional leadership. He points to their hostility to the Federal Reserve Board’s efforts to boost the economy because of fears of hyper-inflation. These fears have been shown to be completely ungrounded, as inflation continues to be far lower than the Fed’s target of 2.0 percent.

However, Krugman also takes a shot at Senator Bernie Sanders for supporting a bill to audit the Federal Reserve Board’s conduct of monetary policy. There are two points worth making here.

First, an outcome of an earlier version of this bill was an amendment to Dodd-Frank which required the Fed to disclose the beneficiaries of the loans from the special lending facilities it created at the peak of the crisis. At the time, the Fed was insisting that beneficiaries and the terms of the loans had to be kept secret.

While there is certainly a rationale for not disclosing a bank’s need for money in the middle of a crisis, surely at some point after the fact, one month, three months, or six months, it must be possible to reveal the loans. After all, the Fed lent trillions of dollars at below market interest rates to banks and other financial institutions (also some non-financial corporations), the public should have a right to know what happened with its money.

To my view, Sanders should be applauded for his actions on this front. It was a bipartisan effort that gave us more information about what went on in the crisis and the extent to which specific banks benefited from access to the Fed’s money.

The other point has to do with political pressure on the Fed. Krugman rightly worries about Republican efforts to prevent the Fed from using its monetary tools to boost the economy, but his line of protection is to appeal to the independence of the Fed. This is even after he acknowledged that the Fed is unduly influenced by the bankers with whom it has regular contact. In fact, the banks actually control five of the twelve voting seats on the Federal Reserve Board’s Open Market Committee that sets monetary policy. (Since two of the governors’ seats are currently vacant due to inaction by Congress, five of the 10 voting members essentially are representatives of the banks.)

While the reaction of most Democrats is to insist that we just have to trust the Fed anyhow, there is an alternative of trying to build up political pressure for a Fed that actively supports full employment policy. This is the thrust of the Fed Up Campaign which involves labor unions, community groups, and other grassroots organizations across the country. There are obvious risks in making the direction of monetary policy a topic of political debate, but it is arguably a better long-run path than leaving in place a process where the banks have a very big thumb on the scale in setting policy.


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