October 25, 2005

Bush’s appointment of a new Fed chief, Ben Bernanke, has received rave reviews from almost all quarters, including the New York Times.

Like Greenspan, Bernanke is expected to be, above all, an inflation fighter at the Fed.

And there are a couple things wrong with that.

For one, the Fed, by statute, is supposed to be as interested in full employment as it is in low inflation.

That hasn’t been the case for decades now, though.

Since at least the time of Paul Volcker, who sabotaged the Carter Presidency by imposing a harsh recession in the late 1970s, straight through to the overrated Alan Greenspan, Fed chairman have been doing the work of Wall Street, not Main Street.

And Bernanke pledged to maintain Greenspan’s policies, with only one slight change: He intends to set a target for inflation, and a very low one at that.

To keep inflation low, especially at a time when energy prices are skyrocketing, he will likely keep raising interest rates.

That, in turn, will end up smothering the economy and inducing a recession.

“If you target inflation, you don’t give a damn about unemployment,” says Dean Baker, co-director of the Center for Economic Policy Research.

Bernanke, Baker acknowledges, is “a hell of a lot better than the alternatives”—especially the two people who were seen vying for his spot, R. Glenn Hubbard and Martin Feldstein. “He’s a very orthodox economist. He’s not an ideologue. He’s not going to spout off about privatizing Social Security and giving tax breaks to the wealthy, so give him credit for that.”

Baker’s co-director, Mark Weisbrot, also gives Bernanke credit for acknowledging that the real unemployment rate is higher than the official statistics.

But Baker and Weisbrot both worry about Bernanke’s focus on inflation, which The New York Times business page assigned as his number one task: “First on To-Do List: Tame Inflation,” the article said.

“That could throw millions of people out of work,” Baker warns.

What Fed chairmen (and New York Times headline writers) refuse to understand is there are worse things than inflation.

Like mass unemployment.

Like falling wages.

Like a tidal wave of bankruptcies.

But Fed chairmen have been perfectly willing to risk recessions so as to keep inflation low, which helps the financial sector of the economy above all, and so as to curtail workers’ bargaining power—and companies across the board want to put the clamps on that.

It’s ludicrous for a democracy like ours to give so much power over the economy to one appointed official.

We need to democratize the Fed, and insist that it focus not just on inflation but on unemployment, as well.