A Significant Letter

The Wall Street Journal has an article this morning about an open letter sent to Federal Reserve Chairman Ben Bernanke, a letter signed by leading economists and investors.

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Given the list of influential individuals signing this letter, it is sure to set the financial world (and therefore the political world) abuzz. That is all to the good. We need a vigorous debate about the Fed’s plan to buy $600 billion in additional U.S. Treasury bonds. It will, after all, have the effect of monetizing the debt and devaluing the dollar, and it risks triggering inflation. And oh, by the way, it won’t create jobs.

It is exactly the wrong policy at exactly the wrong time.

Defenders of the Fed’s policy will undoubtedly argue that this letter (which was largely organized and coordinated by the economic website e21, which I’m delighted to be affiliated with) amounts to a political attack on the independence of the Fed. That assertion is silly. Are we to believe that in a free society, the Fed and its policies are somehow immune to criticism – that when the Chairman speaks, no contrary voices are allowed to be heard?

The letter to Chairman Bernanke doesn’t argue that the Fed doesn’t have the right or the power to pursue its policy; it is simply questioning the wisdom of those policies. And its policies are manifestly unwise. It will deliver another body blow to an economy that is already weak and reeling.

This debate reminds me nothing so much as the economic debates that took place in 1981, at the dawn of the Reagan presidency, when issues that were thought to be somewhat esoteric (like monetary policy) were at the heart of our economic and political conversations. We learned then that the right monetary policy can make a huge contribution to economic growth. And we are leaning now that the wrong monetary policy can do the opposite.

For the full post, visit Commentary Magazine's "Contentions" blog.