Within days after Tea Party Republicans nearly drove the federal government into default to gain political advantage, they have been topped by presidential candidate Rick Perry. “Texas Governor Rick Perry, the latest entrant in the fight for the Republican presidential nomination for 2012, said it would be ‘almost treacherous — or treasonous’ for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.” Because by helping to prevent recession, doing so might be part of a plot to help Barack Obama win re-election.
Now for reasons of lack of expertise, etc., I generally don’t write about Federal Reserve monetary policy. But since Perry has broken what has been considered a taboo by responsible politicians and politicized that policy, let’s take a look at how the federal funds rate has been changed since 1987 – under Republican Fed chairmen – in the run-up to Presidential elections.
It is generally believed that Federal Reserve interest rate changes take six to nine months to affect the economy, so let’s look at the federal funds rate from some time in the year before the Presidential election year to the middle of that election year.
In 1988 you had a Republican incumbent, Ronald Reagan, trying to make things look good to help elect his VP, George HW Bush, as his successor. In September 1987 the federal funds rate had been 7 ¼ percent, but it was cut then cut to as low as 6 ½ percent by Reagan’s Republican appointee Alan Greenspan before being increased back to 7 ½ percent in June.
In August 1991, with Republican George HW Bush heading into a re-election campaign, the rate was 5 ½ percent. But by the middle of election year of 1992, Republican Greenspan had cut it by 1 ¾ percent to 3 ¼ percent, stimulating the economy in the run up to the election.
Democrat Bill Clinton was President in mid 1995, when the federal funds rate was 5 ¾ percent. A year later Republican Greenspan had cut the rate only slightly in the run-up to the election to 5 ¼ percent. Democrat Clinton later re-appointed Republican Greenspan as head of the Fed.
When Democrat Clinton was looking to pass on the Presidency to his VP Al Gore, Republican Greenspan created a headwind by increasing the federal funds rate from 5 percent in mid-1999 to 6 ½ percent in mid-2000, an increase of 1 ½ percent.
When Republican George W. Bush was seeking re-election in 2004, Republican Greenspan left the rate low, increasing slightly from 1 percent in mid-2003 to 1 ¼ percent in mid-2004. This is the very period for which many blame the Fed for keeping interest rates “too low for too long” and inflating the housing bubble.
And later, when Republican Bush would have liked a strong economy to help elect Republican John McCain as his successor, Republican Ben Bernanke slashed the federal funds rate from 5 ¼ percent in mid-2007 to 2 percent in mid-2008, a decrease of 3 ¼ percent.
From this history, an irresponsible, deceptive Democrat could construct a plausible conspiracy theory of Republican Fed chairmen slashing interest rates to help Republican incumbents in 1992 and 2008, keeping rates too low to help a Republican incumbent in 2004, and jacking up rates to hurt a Democratic incumbent in 2000. While remaining neutral in the other two elections. But no major Democratic politician said anything like that.
In part, because there are plausible explanations for every one of these Fed interest rate changes that have nothing to do with politics. In 1987 the stock market crashed, and Greenspan cut rates briefly until the storm passed. In 1992 the U.S. was crawling out of recession; the same was true in 2003. In 2007 and early 2008 the U.S. was plunging into recession. In 2000, there was a stock market bubble and rising prices, justifying higher interest rates.
But Democrats also shut up with regard to the Fed because having monetary policy independent from short term political fights is considered the only responsible policy by most business and government leaders. It would create even further damage to our economy if people could no longer trust that the value of our money would not be manipulated by self-serving politicians. So by and large both Democrats and Republicans have respected a truce, and kept their mouths shut about monetary policy.
Except Rick Perry, who claims that even with unemployment above 9 percent, the possibility of deflation, and the possibility of a double dip recession, further monetary stimulation would constitute “treason” and a conspiracy by a Republican Fed chairman to get a Democratic President re-elected.
Now reasonable people can disagree on what monetary and fiscal policy ought to be in the face of the massive deleveraging of excess debt we are going through. In fact, some members of the Federal Reserve interest rate setting committee have dissented in recent votes. But treason?
“I have never heard the rhetoric ramped up the way Governor Perry did,” one economist told this source. “That’s a very troubling development. We expect more of our president and should expect more of our presidential candidates.”
I hope business leaders will keep that in mind when Perry starts traveling around the country looking for campaign contributions. My general rule of don't vote for any Democrats for office in the City of New York, don't vote for any Republicans at the federal level on generational equity grounds, and don't vote for any State of New York incumbents of either party, would likely be in force in 2012 in any event. But Perry has qualified for an even more emphatic vote against.