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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

The AfPak Dilemmas: Part of the Problem

One of the basic distinctions I try to emphasize in my courses is the difference between a dilemma and a problem. A dilemma involves choosing between (or among) roughly equivalent good (or bad) options, while a problem calls for selecting what is determined to be the better option among a range of choices that are not deemed even roughly equivalent. This is a somewhat “loose” distinction that comes in handy when trying to understand the work of public administrators.

I think the difference applies in the current situation in Afghanistan. A Facebook post this morning from a former student stationed there drew attention to a Washington Post story about a decision to pull US troops from deployment in a sparsely populated area where the Taliban was active and instead focus US military commitments to more populated areas where US troops can be used to greater effect.

Going beyond the details, this is a classic case of “dilemma dealing” in that the commanders had to chose between two equally (again, roughly speaking) bad options. It is also an indication of the current state of affairs in what the Post now calls the “AfPak” front. The focus is no longer on solving the Taliban “problem”, but rather in dealing with the dilemmas created by our commitment to confront that problem.

Understood this way, one can have a greater appreciation of the significance of the current debate over “strategic options” within the Obama Administration. Strategies are designed to address problems, but it would be a mistake for them to be considered without focusing on the dilemmas they create for the troops on the ground. McChrystal’s now well publicized report should be read for what it is: an assessment of the dilemmas the US deployment is facing that have to be contended with. It is not, as some have read it, a call for any particular change in the strategic approach. This is not an emerging MacArthur-Truman confrontation as some seem to be implying.

September 24th, 2009 Posted by | accountabilitybloke | no comments