Bernanke Under Threat of Retaliation

Ben had better watch out. Rick has given him a warning: “If you start printing money again, don’t come down to Texas, things could get ugly.” That is in essence is what Rick Perry, Governor of Texas and Republican presidential candidate, said a few days ago.

To be precise, here is the translation of the remarks that Rick Perry made before an audience of voters in Iowa:

“If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous, in my opinion.”

The White House was quick to react. The spokesperson for Barack Obama concluded that a presidential candidate ought to be more responsible and should not attack the Fed’s independence whilst campaigning. Even fellow Texan Karl Rove, Republican electoral guru and former éminence grise behind George W. Bush, criticized Rick Perry! It is true that the two Texans aren’t the best of friends. Allow me to point out in passing that Rick Perry is not a clone of George W. Bush, contrary to what you will soon be hearing broadcast everywhere in France.

Far from wishing to support the candidacy of Rick Perry, a figure about whom I have my reservations, I would, however, like to clarify several important points that are a credit to the candidate.

1) It is not unusual for a U.S. presidential candidate to give an opinion on the fundamental issue of defending the dollar.

The Fed’s quantitative easing policy has diluted the value of the U.S. dollar, the reserve currency. The second phase of quantitative easing (November 2010 – June 2011) involved $600 billion. Its impact on growth is at best ambiguous.

If Rick Perry meant that the Fed should not recommence quantitative easing because that would fuel inflation and discredit the dollar, his opinion is perfectly respectable. It even lends credibility in economic matters to the Texas governor.

2) If Rick Perry had said the opposite, there would have been outrage.

If a presidential candidate was calling on the Fed to resume its purchase of long-term Treasury bonds, there would be real reason to worry. Rick Perry, in his colorfully frank Texan language, has said out loud what many are quietly thinking. Bravo!

3) The Fed is reaping what it has sown.

By engaging in a policy of quantitative easing, the Fed has almost departed from its realm of monetary policy to enter into fiscal policy. It justified this step by talking about the risk of deflation. The Fed wanted to act to avoid a relapse into recession, with a reminder that its dual mandate obliges it to preserve price stability, alongside the promotion of maximum employment.

Since 2008, many other factors have caused the Fed’s independence to be questioned. Should the non-financial sector’s 2008-2009 claims that monetary policy was concerned be accepted? Yes, in as far as Bernanke has striven to protect the financial system from collapse. But the urgency and the necessity have caused the Fed to go a long way. It coordinates its policy with the Treasury, they consult each other a lot. Not only on issues of monetary policy, but especially on crucial issues of banking regulation. All of this has resulted in the Fed’s independence.

I’m not sure it could have been done any other way. But the outcome is there to be seen. Moreover, it could be said to be similar to the ECB’s policy of buying Italian bonds.

Seen in this very specific context, Rick Perry’s comments are not those of a cowboy who shoots faster than his shadow. They are those of an upholder of a certain monetary orthodoxy. This is something we should welcome, not deplore.