Mexico just got done with a presidential election, putting the PRI back in power after 12 years out of office. The last time the PRI won was in 1994; the Mexican central bank, managed directly by the government, goosed the money supply leading up to the election, which helped goose the economy and pave the way for a PRI win. However, by the end of 1994, the peso was in free fall due to the inflationary pressures and an US-led bail-out was needed.
The Federal Reserve is somewhat independent of the government of the day, having its decision-makers appointed by the president and approved by the Senate, but serving fixed terms that can't be terminated early if they tick off Washington. That gives the Fed some distance from the politics of the day and allows them (in theory) to do what's best for the economy in the long-term rather than what's best for the party in power.
Case in point on why that's a good thing was a Drudge linked-to piece from the Washington Examiner-
Sen. Chuck Schumer, D-N.Y., exhorted Federal Reserve Chairman Ben Bernanke to stimulate the economy before November through some form of quantitative easing or other monetary policy, which Bernanke said could create jobs.
“Despite two false starts, we’re having a much rougher time than we ever imagined getting unemployment down,” Schumer told the Senate Banking Committee. “So get to work, Mr. Chairman.” Schumer said Bernanke needed to stimulate the economy because Congress refuses — “maybe after November we will,” he opined.
Two problems with that. The first is that monetary policy has largely hit a wall; the normal tactic of lowering short-term rates was taken to its end-point, and short-term rates are just above zero. The next stop is for the Fed to start shifting its habits from buying short-term Treasury Bills for its portfolio and shift to longer-term T-bonds; in theory, that should lower long-term interest rates and thus encourage firms to expand and individuals to buy more cars and houses.
The problem there is that banks are hesitant to lend these days; even if they can get money from the Fed for next to nothing, the Fed doesn't pay their default risk when loans go bad, nor does the Fed help them get new post-2008 regulations off their backs. Low interest rates are only stimulating if you can get them.
Secondly, we could well see a bad bout of inflation once the economy does recover and all the cheap credit being issue starts to result in too many dollars chasing too few goods. We likely won't have the same problems the Mexicans did in 1994, but it Bernanke did take Chuck Schemer's (that's what my spell-checker wants, so I'll go with it) advice, we'd be running the risk of some big inflation.
That's why having the Fed be independent is a better idea than the Ron Pauls of the world would have you believe.
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