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Romney v. Obama: The 2012 Race May Hinge On the Fed

The opinions expressed by columnists are their own and do not necessarily represent the views of

Mitt Romney is the favorite to win the Republican nomination for president. If nominated, the campaign against Obama may well hinge on the dramatically different views on monetary policy between Obama’s Fed chairman, Ben Bernanke, and that of R. Glenn Hubbard. Hubbard is dean of the Graduate School of Business, Columbia University, former Chairman of the President’s council of Economic Advisers, and, with Harvard’s N. Gregory Mankiw, one of Gov. Romney’s most trusted economic policy counselors.


Hubbard, with journalist Peter Navarro, has written an important book: Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity (foreword by public intellectual — and Supply Side doyenne — Amity Shlaes).

This books lays out a credible blueprint for the restoration of American prosperity. Of most striking relevance is the chapter on “Why Easy-Money is a Dead End,” and, in particular, why “The Road to American Prosperity Cannot be Paved with a Cheap Dollar.”

“Fed chairmen such as William McChesney Martin and Paul Volcker have fiercely protected the independence of the Federal Reserve and conducted Fed policy with price stability and sound money foremost in their minds. But the United States has also experienced another type of Fed chairman. This type is an activist who strongly believes that monetary policy should be used in a discretionary manner not just to keep the American economy on its basic track but also to fine-tune the economy over the ups and downs of the business cycle.

Despite their successes in some important areas, our last two Federal Reserve chairmen, Greenspan and Bernanke, have taught us that there is much truth in what [Milton] Friedman said about the dangers of discretionary activism.”

Contrast Hubbard’s hawkish stance against “the dangers of discretionary activism” with Chairman Bernanke’s rhapsody for the exercise of such power in his recent lecture at George Washington University, entitled Origins and Mission of the Federal Reserve.


Here’s Bernanke:

“Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy just to stabilize the economy. And in particular, under a gold standard, typically the money supply goes up and interest rates go down in periods of strong economic activity. So that’s the reverse of what a central bank would normally do today. So again, because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation. Now some people view that as a benefit of the gold standard, taking away the discretion from central banks and there’s an argument for that, but it did have the implication that there was more volatility year-to-year in the economy under a gold standard, and there has been in modern times.”

One nostalgically longs for the moment in January 2008, just before the financial markets meltdown and the ensuing Great Recession when the premier chronicler, then and now, of contemporary monetary policy Roger Lowenstein, could write in the New York Times Magazine:

“Indeed, the United States has spent only 16 months of the last quarter-century in recession — a vast improvement over previous eras. The recent period has been called the Great Moderation; growth cycles have evened out, and inflation has abated in almost every country around the globe.


Perhaps the Great Moderation has been the result of good luck. Or perhaps it has been because of improved management skills —business learning not to overstock inventories, for example. Bernanke has written that it is something else. He sees it as a result, in large part, of better monetary policies. He says that central bankers have finally learned how to guide economies — not with mystique but with economic science. If that is so, we will not need a wizard behind the curtain anymore, only intelligent engineers who can steer markets to a promised land of rational expectations. To prove that he is right, Bernanke will need to minimize or, if possible, avoid the looming recession that looks ever more likely.”

The wistful hope that “central bankers have finally learned to guide economies — not with mystique but with economic science” lost all plausibility less than a year after the utterance of the words.

The juxtaposition here of Hubbard’s position with Bernanke’s does not imply any position by Hubbard on whether the classical gold standard might be a suitable mechanism with which to conduct Fed policy with “price stability and sound money foremost” in mind. Yet Hubbard’s exaltation (with a witty wink to Simon and Garfunkel) of William McChesney Martin, who chaired the Fed throughout the Bretton Woods era, surely implies no Bernanke-esque hostility toward gold.

Further, in 1987 Hubbard co-authored an elegant NBER working paper with Charles W. Calormiris, International Adjustment Under The Classical Gold Standard: Evidence For the U.S. and Britain, 1879 – 1914. Hubbard is exceptionally equipped to understand the gold standard’s operations.


Bernanke and Hubbard present diametrically opposing positions. Because monetary policy is the fulcrum of the economy, this matters. Who is right? Among the most trenchant responses to Bernanke’s critique of the gold standard was that of University of Georgia economics professor (and gold standard agnostic) George Selgin, writing in

“Bernanke’s discussion of the gold standard is … little more than the usual catalog of anti-gold clichés …

“No mention of the high inflation before 1921–as high as 40%, on an annualized basis, during some quarters; no mention of the record numbers of bank failures throughout the 1914-1930 period; no mention of the sharp recession of 1920-21; and no mention of any possible contribution by the Fed to the stock market boom (or “bubble,” as Bernanke would have it) of the 1920s. Rather less amusing was his quotation of that “famous statement by Andrew Mellon” about liquidating stocks etc.: poor Mellon never said it, in fact: the words were Hoover’s, and were intended as parody. But why waste a perfectly good straw man?”

Ben Bernanke presents as an admirable, honorable, elite public servant gamely — valorously, even — attempting to do the impossible: manage monetary policy without a reliable unit of account. Lowenstein calls himThe Hero,” in the current cover story (ambivalently entitled “The Villain” in the online version) of the April Atlantic.

“Ultimately, Bernanke’s legacy will depend on whether he can fully exit from the mortgage debacle without bequeathing a new one, or lighting an inflationary fire that becomes uncontainable. … For sure, no one knows where either inflation or unemployment will be in five years’ time.


“The visceral criticism of Bernanke is hard to fathom, but it is in part the flip side of the enormous trust that we are asked to place in the modern Federal Reserve. At least in the time of Nicholas Biddle, and even during the formative years of the Fed, banknotes, being liabilities, could be redeemed for something of value, usually gold. Now our dollars are exchangeable only for more dollars. This is what alarms the originalists. As the publisher, Bernanke critic, and gold bug par excellence James Grant eloquently put it, ‘We have exchanged the gold standard for the Ph.D. standard, for soft central planning.’”

The central lesson of the Great Recession might be that if men of the intellect and integrity of Greenspan and Bernanke can’t keep the world dollar standard from, dramatically, going off the rails then nobody can. The world needs monetary authorities who must — as part of the system itself —abide by the “rules of the game.” They did so under the classical gold standard. They did so under Chairman Martin. They can do so yet again.

Two good men, Bernanke, from Obama’s camp (though it should be noted that George W. Bush nominated Bernanke to great applause from conservatives who might now be eating their words), and Hubbard, from Romney’s camp, offer two profoundly different policies. The contrast, and the stakes, hardly could be greater. Does America desire the monetary policy, “discretionary activism,” attributable to Mr. Obama? Or does America want “the price stability and sound money” which fairly can be imputed, via Hubbard, to Mr. Romney?


The answer to that question may well determine the outcome of the 2012 election. Of greater importance, the answer may determine the future prosperity of America and the world.

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