Unreflections in a Not-So-Distant Mirror: When Reagan Tried to Put The Fed Into The Oval Office – Obama Looks Like Watered-Down Milquetoast (A guest-post by Benjamin Cole)

Do news and history always trump fiction?

Read an “old” newspaper, from the ancient pre-Internet era of December of 1984: “The Reagan Administration is considering a plan to would place the now autonomous US Federal Reserve under some form of administrative control, The US Treasury Secretary, Don Regan, said yesterday.”  That was AP wire copy, and the story went national.

Long forgotten today, given the near-hysteria and requisite orthodoxy on the American right that only tight money is sound policy and patriotic, is that the Reagan White House tried to skin Fed Chief Paul Volcker alive back in 1984.  And not just Volcker—they wanted to eviscerate the Federal Reserve Board, and shift control of the money supply into the Oval Office.  Inflation in 1984 had just dropped under 5 percent, and the Reaganauts wanted the Fed to print a lot more money, and keep the economy flourishing.

Secretary Regan mustered more than a few arguments. “The United States is the only country in the world that has a totally independent central bank,” he averred.  The Fed was an errant oddball institution, obsessed with fighting inflation instead of promoting growth, the Reaganauts charged.  Ergo, Volcker (originally an appointee of President Jimmy Carter) was a loose cannon on the deck of macroeconomic policy making.

Some Reagan hagiographers have tried to pooh-pooh Regan’s commentary as not truly part of the Reagan heritage, and cite Reagan’s gentlemanly public statements about Volcker as proof of the pudding.  Indeed, “Reagan, The Inflation Fighter” is a subspecies of GOP monographs, written even by people who know better, such as GOP solon and Stanford University academic John Taylor.   But the Reaganauts are engaging in Soviet-style revisionism.

Speaking before the National Association of Realtors in December 1984, President Reagan echoed the Regan assault on the Fed. “Let me assure you we are not pleased with the recent increases in interest rates,” said President Reagan. “And frankly there is no satisfactory reason for them.”

And, in an early version of the GOP talking-point coordinated attacks, other prominent establishment pundits simultaneously bared fangs at the Fed, including the Wall Street Journal, which also opined that Fed was being too severe.

By all accounts, Volcker was an outsider in the Regan White House (he was independent after all) and Regan was an insider.

Later, Volcker would recall that the Reagan White House actually did not have a coherent monetary policy in mind—even as they wanted to seize control of the nation’s money supply—and so he was able to sandbag their assault on the Fed.

“I saw him (Reagan) from time to time, but I was not a close intimate of President Reagan’s. His entourage in the White House, or certainly in the Treasury, were very critical at times. They were… kind of a funny mixture. They had monetarist doctrine, supply-side doctrine, libertarian doctrine all mixed together, so some of it wasn’t terribly coherent, which helped me a bit,” Volcker told PBS in 2000.

Flash forward to 2012. Today inflation is one-half that of 1984, the level the Reaganauts and the WSJ thought was well under control. And the economy is in a much deeper mire perhaps12 percent below trend or potential.  Unemployment is persistently high, and about 5 percent of the population has dropped out of the work force. That is, one of 20 people in this country, who were gainfully employed in 2008, may never work again, given the ongoing doldrums.  Real estate is underwater coast-to-coast, loans made in nominal dollars.

One might expect the President of the United States to breathe fire under such circumstance—a modern-day Don Regan would lay relentless siege on the Fed.

Not so.  There is no reflection in the not-so-distant mirror.

Instead, there is a mysterious silence, indeed a vacuum, from the Obama White House on Fed policy. Tim Geithner is the current Treasury Secretary, almost certainly headed to a career on Wall Street soon. A Google search on Obama and monetary policy turns up almost nothing—Fed policy (our most important macroeconomic policy-making agency) is terra incognito for Obama.  With search, one can find the Brazilian president discussing the U.S. Fed policy, but not Obama.

Has Team Obama drifted dangerously? One can only conclude so. Unlike the Reaganauts, they did not bring the fight to the Fed, and instead allowed the gold-nuts and Governor Rick Perry to own the issue.  Bernanke, who does not inspire awe the way the strong-minded Volcker did, has had to contend to rabid currency worshippers and a rising punditry of inflation-fixated fanatics, such as Dallas Fed President Richard Fisher, without moral support from the White House. Obama’s supine lack of interest in Fed appointments (properly raising the ire of such astute observers as Scott Sumner) nearly constitutes malfeasance in office.

And just how koo-koo are today’s self-appointed anti-inflationistas?

In 2009, Richard Fisher traveled to Japan, a nation that has endured 15 percent deflation in the last 20 years of checkered recessions—and then lectured them on the evils of inflation, which he equated to “rot” in the economy.  Lecturing anorexics on the dangers of fatty foods may come to mind, but the serious point is that Bernanke is moored in a dangerous, even perverted milieu, and badly needs help to make the pro-growth decisions that have to be made.

Let us hope that Team Obama wakes up—though it may not matter soon.

If GOP contender Mitt Romney wins the White House, most likely the pressure on the Fed will dissipate—indeed, one can anticipate John Taylor as Fed chief, devising a version of the Taylor Rule that calls for steady QE (as he advocated for Japan). “Deficits don’t matter”—a Bush era mantra—may be heard again.  Seems likely, no?

Like I said, history and news always trumps fiction. You couldn’t make this stuff up.

13 thoughts on “Unreflections in a Not-So-Distant Mirror: When Reagan Tried to Put The Fed Into The Oval Office – Obama Looks Like Watered-Down Milquetoast (A guest-post by Benjamin Cole)

  1. “they had monetarist doctrine, supply-side doctrine, libertarian doctrine all mixed together”

    Nothing wrong with that, so do I. But Milton Friedman wanted to tighten money at that time. Reagan was not a deity, he was a politician. The opportunity cost of sticking to principles is absurdly great when you’re a politician. And people respond to incentives.

  2. Scott says the problem is that nobody understands monetary policy. (Bernanke’s just one guy, and even he may have been assimilated by the Fedborg). Electing Romney won’t change that – any new appointments he makes will be from an economics profession that doesn’t get the role of monetary policy.

  3. Benjamin, I certainly agree that the Fed is getting it wrong now. Monetary policy undoubtedly is overly tight. However, I think the Obama administration should be praised for now politicizing the conduct of monetary policy. In terms of “helping out” with bail outs the Fed surely has become seriously politicized and that in my is a major problem.

    What is need is is not a more politicized Fed, but a much less politicized Fed.

    The real problem with the Fed is that its mandate is extremely unclear. The dual mandate is nonsense. The Fed can not deliver high employment. Yes, it could probably increase unemployment, but it is not meaning to think that the Fed in the longer term can do anything to increase employment or real GDP growth. The Fed can only influence NGDP and prices – both the level and growth.

    Therefore if the Obama administration should have done anything it should have changed the Fed’s mandate to NGDP level targeting regime and made the Fed truly independent, but also accountable to that mandate.

    The experience with a seriously politicized Fed in the early 1970s under Nixon certainly is not something to long for and dare I argue that if Regan has got his way then the US economy would not have experienced the Great Moderation. We want the Great Moderation back – not 1970s.

  4. “Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length (mathematical constants). However the lag for nominal gdp (the FED’s target??), varies widely.”

    Assuming no quick countervailing stimulus:
    Ready to break:

    11-Oct ,,,,,,, 0.26 ,,,,,,, 0.13
    11-Nov ,,,,,,, 0.24 ,,,,,,, 0.14
    12-Dec ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Jan ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Feb ,,,,,,, 0.29 ,,,,,,, 0.15
    12-Mar ,,,,,,, 0.26 ,,,,,,, 0.13
    12-Apr ,,,,,,, 0.24 ,,,,,,, 0.14
    12-May ,,,,,,, 0.24 ,,,,,,, 0.10
    12-Jun ,,,,,,, 0.27 ,,,,,,, 0.04
    12-Jul ,,,,,,, 0.25 ,,,,,,, 0.04

    Real-output falls: 14 -> 4 (April month-end to June month-end)…
    with no change in inflation. That’s called stagflation (business stagnation accompanied by inflation).

    Fed intervention is inescapable.

    This is a case where the FED should target nominal-gDp. In the interim the FED should ignore a surge in inflation (it will be transitory).

  5. Lars and Saturos–

    Thank you for your thoughtful replies.

    I do not disagree that the Fed should be rules-bound, in a market monetarism sort of way, and independent. I would err on the side of growth, but that is a side-quibble. I would happily endure moderate inflation in exchange for robust growth.

    But that is not the case today. Today we have a Fed voluntarily suffocating the USA economy.
    Faced with a much-looser strangle-hold, the Reaganauts went into battle-mode to effect the changes they wanted—a lot more money printed.

    Obama is not balancing the extremist Theo-Monetarists, who have seized the context on Fed policy. He has not created a crew of talking-pointers who point out Bernanke’s penuriousness. Obama is adrift on monetary policy, with dire consequences for the American people and our economy.

    It is up to Krugman, a Keynesian, to point out how much Bernanke has succumbed to the perversions of the Theo-Monestarists (in print today, NYT magazine, through old news in the blogosphere).

  6. Pingback: Benjamin Cole Recounts Some Inconvenient History « Uneasy Money

  7. I just don’t have anything optimistic to say. Unless we have people like Ron Paul. We won’t have any change that we would like to see. Corporations are going to continue to profit hugely. I’m just worried about unemployed individuals who are being hurt the most. By the way including myself.

  8. Tas-

    I have struggled with intermittent employment since 2008. I deeply sympathize, and not in a condescending way. Indeed, I recently decided to sell assets and migrate to Thailand, where my wife and family live. The business climate was one factor in the decision.

    I wish you the best of luck. I disagree with your monetary policies—I would prefer a robust bullish growth oriented Fed for this time frame—but hopefully we can have policy disagreements without becoming disagreeable.

    I am in my mid-50s. At one point I had sent out 200 resumes without a single response. I have managed to scrape by on freelance work, and rental income. Luckily. I had moved a Airstream trailer onto the parking lot of a factory I own, and so have lived rent-free (and illegally) for last six years.

    I have heard no one address the issue of guys in their 50s finding a job. We can’t.

  9. Wow Benjamin! Finally I get the opportunity to say “great blogging!” LOL. Your history of the Reagan White House I find very interesting. I wonder if you have any links or sournces for that-not that I don’t believe you but I’d like to learn more about that history.

    While I’m a self admitted partisan Obama Democrat-back at Firedoglake I was the resident “Obamabot”-I do admit that maybe the criticism of people like Scott is justified in terms of his monetary policy.

    You say you can’t find anything about Obama’s monetary policy? Cause that’s what I’ve been reflecting on-the fact that there has been a number of books and exposes about the Obama White House-David Corn of Mother Jones just wrote a nice one-but nothing that I’m aware of as far as monetary policy is concerned. It’s surprising if no one has condisdered taht this might be another way to juice the skids as fiscal policy at least as long as we have a GOP House is a nonstarter.

    And yes, there’s no question that the GOP sure changes its monetary tune depending who’s in office as does their offical organ the Wall Street Journal editorial page.

    I must admit that I kind of differ with Lars on this-I’m not one of the Ron Pauline “End the Fed” guys but I wouldn’t mind cutting back on its “independence.” What that basically means is independence form concern about anything other than the vaunted price stablity. Whatever you want to say about the Fed under Nixon, the overall framework between the Fed and the Treasury worked pretty well from the time of Eccles through LBJ’s term.

  10. Benjamin, there’s a good article I just read, “We’re All Temps Now” by Michael Bernick at Zocalo Public Square.org. Best of luck in Thailand.

  11. Pingback: Reagan? He loved his big deficit, too

  12. Pingback: Benjamin Cole on the History of Fed Independence

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