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The Fed’s Coup: A Stimulating Takeover of Economic Policy

The biggest news to come out of the midterm elections actually took place on Wednesday when the Fed effectively took over macroeconomic policy just as it did under Paul Volcker three decades ago. The Fed had been signaling its intent for awhile, and it is now clear that this scenario and plan was put on the table when the election outcome became clear weeks ago.

The bottom line logic is simple: if we cannot count on government stimulus through the political-based fiscal system, let’s do it through the monetary route. A Fed that factors in the lack of political will into it decisions is the best offset to a constitutional system that lacks the capacity to take action. Volcker’s Fed did the same by tightening the supply of money and forcing an end to the inflationary dynamics that hit the US under Carter/Reagan. The Fed’s power and legitimacy at the time was high enough to sustain incredible rises in interest rates that played major role in a recovery for which Reagan-worshippers still take credit. That could be in the cards for Obama as the Fed effectively shifted the stimulus spending dynamic into the private sector. Yes, risky stuff — but brilliantly staged. It was a coup of quiet but monumental importance….

The risks are not merely economic. Politically, Bernanke and friends are likely to become targets in a Congress where Ron Paul (and his few friends) are now in position to make waves of their own in both his own chamber and the Senate. Staying the course in the face of an increasingly hostile attack on the Fed’s legitimacy from the anti-Fed right — and populist left — will be tough, and they will need White House’s VERY QUIET support to do so. For Obama, this can mean a 2012 election similar to Reagan’s 1984 “morning in America” victory.

Wonder if Reagan ever thanked Paul Volcker for performing that coup…..

November 4th, 2010 Posted by | accountabilitybloke | no comments