Explaining Southern California's economy

Econ 474: Why does the Tea Party think Ben Bernanke is a traitor?

This week's Republican candidates debate, presented by CNN and sponsored by the Tea Party, featured a moment when Texas Gov. Rick Perry was cheered for restating his rather negative views of Federal Reserve Chairman Ben Bernanke. This is from Talking Points Memo:

[H]ost Wolf Blitzer brought up Gov. Rick Perry’s comments that Federal Reserve Chairman Ben Bernanke’s emergency economic policies “almost treasonous.” Perry stood by the comment…“I am not a fan of the current chairman allowing that Federal Reserve to be used to cover up bad fiscal policy by this administration,” Perry said. “And that, I will suggest to you, is what we have seen.”

Perry continued:

“It is a travesty that young people in America are seeing their dollars devalued in what…we don’t know if it was political or not because of the transparency issue,” Perry said. “But I stand behind this: we need to have a Fed that’s working towards sound monetary policy, that creates a strong dollar in America, and we do not have that today.”

What exactly does he mean by "a strong dollar in America?" Perry is arguing for a strong dollar relative to other currencies, a policy that's shared by his fellow candidates, Mitt Romney and Michelle Bachman — and regarded as a sort of holy writ by Ron Paul. Opponents of the policy insist that a weak dollar makes U.S. imports cheaper and helps us to avoid running big trade imbalance with countries that keep their currency low, like China. 

A risk of a weak dollar is inflation, as imported goods rise in price. For the U.S. right now, inflation isn't much of a factor — a good thing, because that's helped us avoid a replay of the stagflation of the 1970s, when inflation and unemployment both ran in the double-digits. In fact, inflation is so not a factor that some economists are starting to ask whether a weak dollar is really that much of a problem anymore. In any case, the Federal Reserve has been keeping the dollar weak for much of the past decade. This hasn't affected the dollar's status as the world's reserve currency.

That said, former Treasury Secretary Robert Rubin in 2007 maintained that a weak dollar ultimately lowers the standard of living for Americans, because although we might sell more goods abroad, we get less for them. And then when we want to spend that money, we have to spend more of it to buy pricier imports.

Some GOP candidates and the Tea Party think that Bernanke's Fed has been pumping so much money into the economy, while simultaneously keeping interest rates at historically low levels, that he's pursuing an inflationary policy. Economists like Paul Krugman insist that what the Fed is doing is urgently necessary, as the alternative — deflation, with prices and asset values collapsing — is a disease for which there is no easy cure. Right now, we probably need the weak dollar to keep the economy afloat, so what Bernanke is doing makes sense. And he's as much as declared that the Fed is going to stay its present course, keeping interest rates low for the next two years while possibly selling short-term Treasuries to buy more long-term Treasuries, to avoid printing more money.

So Bernanke isn't doing anything even slightly treasonous, but he is trying to get the economy growing again in order to drive down unemployment. If it works, things may be looking up come November 2012, increasing Obama's chances of re-election. A political benefit of the Fed's policies, to be sure. But the Fed has continue to take action, and if critics call it treason, then Bernanke is just going to have to endure the accusation.

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