Economy: Power Struggle Behind the Foreclosure Crisis
• "Though the public uproar over botched home foreclosures has focused on sloppy and often fraudulent paperwork, a much bigger battle is underway behind the scenes over how much more the banks should be helping troubled homeowners," CongressDaily (subscription) reports. "Consumer groups and state attorneys general around the country are seizing on the foreclosure mess as a way to pressure the nation's banks into making bigger and faster concessions on mortgages for millions of delinquent borrowers who want to stay in their homes."
• "Two top U.S. Federal Reserve officials gave competing views on the need for more monetary stimulus to the U.S. economy, continuing a public debate over further easing even as the core view at the U.S. central bank appears to favor such a move," Reuters reports.
In the two decades before the financial crisis, there was remarkably little partisan or ideological disagreement among economists about how the Federal Reserve should conduct monetary policy. Liberals and conservatives both wanted to keep inflation below about 2 percent and unemployment below about 5 percent. Disagreements were over nuance and timing, not about overall direction. But this week, economists with Republican ties are running newspaper ads warning that the Fed's decision to pump an extra $600 billion into the economy - "quantitative easing" - will debase the dollar and spur inflation. Economists with Democratic leanings say the real danger is the opposite: deflation and double-digit unemployment.
Is there a deepening partisan or ideological split among economists about monetary policy? And if so, what does that say about the state of economics? Do sophisticated models and data analysis take a back seat to political opinion?
-- Edmund Andrews, NationalJournal.com
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Responded on December 2, 2010 11:29 PM
The Republicans would hobble Congress
Truman and Frankel express my own views in this matter well.
Let me just add that the purpose of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978 -- as it applied to the Federal Reserve -- was not merely to codify what is now called the "dual mandate."
The larger purpose was to place in law a procedure for regular congressional oversight of the Federal Reserve, which had already been ongoing since 1975, under a provision known as H.Con.Res. 133. This settled the question of congressional pre-eminence over the Federal Reserve, and inaugurated an era of mutual respect between the two institutions. For the most part, the Federal Reserve began to respond in a forthcoming way to congressional inquiries, and the Congress, in turn, let the Federal Reserve conduct monetary policy as it judged best.
This practice has served both institutions quite well -- so much so that when legislative authority for the oversight process briefly lapsed, during the chairmanship of Jim Leach at the House Banking Committee, both sides quickly agreed to ...
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Truman and Frankel express my own views in this matter well.
Let me just add that the purpose of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978 -- as it applied to the Federal Reserve -- was not merely to codify what is now called the "dual mandate."
The larger purpose was to place in law a procedure for regular congressional oversight of the Federal Reserve, which had already been ongoing since 1975, under a provision known as H.Con.Res. 133. This settled the question of congressional pre-eminence over the Federal Reserve, and inaugurated an era of mutual respect between the two institutions. For the most part, the Federal Reserve began to respond in a forthcoming way to congressional inquiries, and the Congress, in turn, let the Federal Reserve conduct monetary policy as it judged best.
This practice has served both institutions quite well -- so much so that when legislative authority for the oversight process briefly lapsed, during the chairmanship of Jim Leach at the House Banking Committee, both sides quickly agreed to continue with the hearings.
If the new proposals to limit the Federal Reserve to an inflation-only mandate were adopted, Congress would cut off its own right to question the Federal Reserve about anything else. And that includes not only "full employment" but also "balanced growth" and other matters that are mentioned in the preamble to the Full Employment and Balanced Growth Act.
Congress, and not the Federal Reserve, would be the big loser.
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Responded on November 15, 2010 12:24 PM
The Debate is Off Key
I am appalled by my fellow economists.
The Federal Reserve is required by law to pursue its dual mandate, and it is doing so to the best of its ability. It is normal to debate whether policy is too tight or too easy, but the nature of this debate has taken on dimensions that I have never witnessed before in my 40+ years as an economist. It seems to be driven by a partizanhip which I find distressing.
I agree with the policy, but that is really beside the point.
I have also been appalled by the international reaction to the policy. It appears to be uniformed by people like the finance ministers of Germany and Brazil who had ample opportunity to debate the issue with the Federal Reserve.
I do think that the Federal Reserve should have done a better job acknowledging the international dimension of its policy in advance, but involves the general publich not the official sector.
Ted Truman
Responded on November 15, 2010 10:48 AM
The Pot Again Calls the Kettle Black
I don’t know if some Republicans are trying to stake out a position that Democrats are pursuing monetary policy that is inflationary. If so, they are on very shaky ground.
I will leave it to others to point out how low is the risk of inflation now, with the real economy having only begun to recover from its nadir of early 2009. Or to acknowledge that QE2 is only a second best policy response. (The job could be done much better by fiscal policy.)
I will, rather, respond to the political content of the question by pointing out that:
Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s -- leading to high inflation which the White House tried to address with wage-price controls. Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system. Republican Presidents Ronald Reagan and George H.W. Bus...
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I don’t know if some Republicans are trying to stake out a position that Democrats are pursuing monetary policy that is inflationary. If so, they are on very shaky ground.
I will leave it to others to point out how low is the risk of inflation now, with the real economy having only begun to recover from its nadir of early 2009. Or to acknowledge that QE2 is only a second best policy response. (The job could be done much better by fiscal policy.)
I will, rather, respond to the political content of the question by pointing out that:
Thus for the other party to accuse Democrats of pursuing excessively inflationary monetary policy would be akin to them accusing Democrats of pursuing excessively expansionary fiscal policy. Perhaps such accusations will strike some who don’t pay close attention as superficially plausible, even after all these years. But they nonetheless fly in the face of history.
I document all this in “Responding to Crises,” Federal Reserve Policy in the Face of Crises, Cato Journal 27, no. 2, Spring/Summer, 2007.
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