Changes in the money supply, and hence in interest rates, affect economic activity in multiple and often subtle ways. So beware of pundits who make sweeping assertions about monetary policy, particularly if their forte is politics or philosophy or baseball rather than economics.
In other words, ignore a recent column by George Will in which he warns of the supposed political dangers of Janet Yellen as the new head of the Federal Reserve.
Will basically makes several arguments.
Quantitative easing, or QE, the policy of expanding bank reserves well past the level needed to lower short-term interest rates to zero, is a uniquely progressive policy.
The primary objective of QE is to drive up stock prices to benefit rich people, who will then spend more.
Using monetary policy to try to lower unemployment somehow represents the Fed evolving into a central economic planner ... to right social wrongs.
Former Fed Chairman Arthur Burns, a Nixon appointee, corruptly and illegally used his position to further GOP success in elections 40 years ago. Therefore, the Senate must be especially wary of Yellen doing the same for Democrats.
This is pretty much all poppycock.
The Feds initial flooding of the financial system with liquidity in response to the meltdown of investment banks in 2008 began before Barack Obama was elected president or had appointed anyone to the Fed Board of Governors. Ben Bernanke, the intellectual father of QE, is a Republican who had served in a Republican administration and had been appointed to his Fed position by a Republican president.
Nearly all the other board members when the first round of QE began similarly were Republicans named by President George W. Bush. And no opposition by any other Republican governor has emerged.
Yes, as the policy has continued on, the initial broad support among economists has decreased. Opposition to continuing QE is somewhat greater among economists such as Stanfords John Taylor or Chicagos John Cochrane known to be Republicans than it is among known Democrats in the discipline. But support and opposition does not fall along clear party lines.
For example, in a recent talk Chris Sims, the 2011 Nobelist who is solidly in the anti-government-micromanagement camp of economics, was surprising in his dismissal of fears about continuing QE.
And there are many other economists knows either as Republicans or as conservative in their economics who continue to support it, if only as the least bad option. It is not a policy that was or is uniquely liberal.
QE has driven up stock prices, and that does favor the wealthy. Bernanke has voiced approval of a rising stock market as positive for the economy. But this is a collateral effect and not the intended primary mechanism.
The most basic task of any central bank is to maintain price stability and that includes staving off deflation, as well as inflation.
The Bank of Japan failed at that, and look where the Japanese are. Low interest rates alone will not prevent deflation in the aftermath of a severe financial crisis. A growing money supply is key, and that need has underpinned Bernanke-led policies, which Yellen supports, from the start.
Low interest rates and ample liquidity, other things being equal, make business borrowing for new plants and equipment easier.
They make household borrowing to service existing debt or spending easier. They slow the fall of house prices that otherwise would severely undershoot on the way down as they overshot on the way up.
These are the primary reasons for easy money in the wake of a crisis, not a desire for booming stock prices.
Using monetary policy to lower short-term unemployment is not some new form of social engineering by liberals. It has been accepted wisdom in economics for 70 years, even though the naive enthusiasm for it in the 1960s has faded. Moreover, even though some economists argue a central bank should consider only price stability, and Will has supported that, the Fed has had a statutory dual mandate since 1946 to reduce unemployment.
If Bernanke or Yellen or anyone else takes that factor into consideration, it is because he is obeying the law, not because he is a naive sentimentalist.
Yes, Burns was a dishonest Fed chairman who conspired directly with Nixon to jimmy interest rates to favor Republicans in elections.
That was a violation of the oath of office he took. And Alan Greenspan may have walked close to the edge in this area.
But other chairmen, including Bernanke and Democratic-appointed Bill Martin and Paul Volcker, were scrupulous in terms of keeping politics out of monetary policy.
Indeed, Ronald Reagan aides engineered the ousting of Volcker because they thought his insistence on fighting inflation through high interest rates would hurt Republicans.
The fact that Burns was dishonest is no reason to worry about Yellen, who is well known for her integrity.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at firstname.lastname@example.org.