Greenspan, Bernanke, and the Fed

The federal deficit is becoming a central point of political struggle. Republicans in Congress are trying to enact a series of cuts in vital programs while extending the Bush tax cuts for the wealthy. In the midst of this struggle, President Bush has been given the opportunity to make an important appointment. Alan Greenspan, chairman of the Federal Reserve Board (the Fed) since 1987, is stepping down in January, and Bush has nominated Ben Bernanke to replace him.

The Fed’s mission

The Fed’s mission includes promoting maximum employment and stable prices, regulating the banking industry to ensure safety and protect consumers, and maintaining the stability of the financial system. Its role has been made to sound uninteresting, technical, and best left to experts. In fact, it means a lot to working families.

Over the last 18 years, Fed chairman Greenspan has cultivated his image as an economic Merlin, assuring prosperity by his astute reading of the economic tealeaves and subtle policy adjustments. Most of the press have played along, giving him credit for everything from U.S. economic prosperity to saving the world from financial meltdown, while allowing him to escape blame for increasing economic insecurity and class polarization.

Most of the commentary on his replacement has focused on the differences in style between Greenspan and Bernanke, on Bernanke’s excellent reputation and qualifications, on the unlikelihood of significant changes in Fed policy. Some have written of the difficult economic problems that will confront the next chair. Virtually all the press promotes the idea that the Federal Reserve and its chair are non-political, doing work of an essentially technical nature.

But far from being non-political, Greenspan has played an important role in the attack on Social Security and in promoting Bush’s tax cuts for the rich. And since before the Greenspan era, the Fed has largely ignored its mission of promoting maximum employment, and on occasion even promotes unemployment as a means to “fight inflation.” Despite evidence to the contrary, the Fed tends to view any increase in wages as a cause of inflation. Justin Fox, writing in Fortune magazine, points out why this is a problem: “There’s still something strange in worrying along with Alan Greenspan whether the employment cost index [ECI] is rising too quickly when the ECI is what we get paid.” In other words, workers are being tricked into supporting measures that keep their wages low, in the name of price stability.

Wall St. vs. Main St.

The Fed has also failed to regulate the banking industry, allowing huge mergers, an explosion of speculation, and a huge growth of predatory and dangerous credit card and mortgage debt. This has meant vast Wall Street profits — at the expense of consumers and of the financial stability the Fed is supposed to protect. In short, whenever there is a conflict of interest between Wall Street and Main Street, the Fed is on the side of Wall Street.

Will things be different with Bernanke?

Will anything be different with Bernanke as the new chair of the Fed? Even critics of Bush’s economic policies welcomed Bernanke’s appointment. New York Times columnist Paul Krugman praises Bernanke as qualified, non-political, and the best possible Republican for the job. “It would be hard to imagine him doing what Mr. Greenspan did: throwing his prestige as the Fed chairman behind irresponsible tax cuts.”

With deference to Krugman, who is a strong and effective critic of the administration’s economic policies, I am skeptical. In fact, on Oct. 20, Bernanke declared his support for the administration’s tax cuts, which many economists see as irresponsible and whose benefits go mainly to the rich and the multinational corporations. Bernanke was speaking as chair of Bush’s Council of Economic Advisers, a post he accepted in June. To accept a job in the Bush administration is an implicit endorsement of Bush’s policies, which have been a disaster for the working class.

I suppose we should be grateful that Bernanke is neither an incompetent nor a crook. But as Vic Perlo pointed out in this space in 1994, “Isn’t it an outrage that a small group of unelected officials and bank presidents — the “Open Market Committee” of the Federal Reserve Board — can act as the government regulators of the economy? And that their top man, a devotee of spiritualism and doubletalk, is able to mask the real anti-labor goal by talking about inflation while opposing even modest proposals for government caps on drugs and other monopoly goods and services?”

economics at cpusa.org