One of the latent issues of the 2012 presidential race is a referendum on the Bernanke Fed. If Romney is in, Bernanke is out. Jeffrey Bell, a colleague at American Principles In Action and a high octane analyst, observes, “It is crucial for Romney to invite Mr. Bernanke’s resignation immediately upon his inauguration rather than allowing him to serve out the remaining year of his term. There are substantial lags between changes in monetary policy, their effects on the financial markets, and their even later impact on the real economy. By replacing Bernanke immediately Romney would seize an invaluable opportunity to front-load an economic growth turbocharger, reaping dividends during his first administration….”
Pledging to replace Bernanke immediately during the campaign could dominate a news cycle. And the idea is not far afield. On October 1, in Romney Bashing Bernanke Rejects Adviser Mankiw’s Policy Views , Bloomberg News’s Joshua Zumbrun quietly dropped one of the biggest scoops of 2012:
Oct. 1 (Bloomberg) — Mitt Romney is shunning the monetary policy views of one of his top advisers, Harvard University’s Greg Mankiw, who has expressed support for Federal Reserve Chairman Ben S. Bernanke and his record stimulus.
Instead, the Republican presidential candidate has criticized the Fed in ways that echo the opinions of another adviser, John Taylor. The Stanford University professor and former Treasury Department official has said the Fed’s large- scale asset purchases risk debasing the dollar while failing to alleviate unemployment.
If Romney wins the presidency, Zumbrun’s scoop could be pivotal for investors. It also provides a crucial glimpse into the prospects for the re-ignition of job creation and American prosperity.
Most of the financial and political media remain fixated on the conspicuous issues of the “fiscal cliff” — histrionic Washington jargon for federal profligacy and anemic tax revenues. Meanwhile, ranking House colleagues of Paul Ryan, including JEC Vice Chairman Kevin Brady and Republican Study Committee Chairman Jim Jordan, press good money — monetary reform — as central to restoring economic growth.
There are two leading schools of thought within the GOP on how best to achieve monetary reform — and the 3% – 4% (or higher) growth rates it promises. These are the “Rule School” and the “Gold School”. The leader of the Rule School is the very same Prof. John Taylor referenced by Zumbrun. The Washington Post, in an October 9th column by Neil Irwin, Romney’s Fed chief: Who would get the job if the Republican takes the White House? tabs Taylor as the leading candidate to succeed Bernanke:
“The American economy doesn’t need more artificial and ineffective measures,” Romney’s campaign said after the Fed announced its latest strategy to pump more money into the economy in September, a policy aimed at bringing down unemployment. “We should be creating wealth, not printing dollars.” Romney has said he would not reappoint Fed Chairman Ben S. Bernanke when his term expires Jan. 31, 2014, about one year into the new presidential term. …
Irwin then lists Bernanke’s possible successors. At the head is Taylor, “a Stanford University economist and a leading monetary economist. Central bankers the world over use his ‘Taylor rule’ as a benchmark to help analyze where they should set short-term interest rates, given economic conditions in their nations. He has also emerged in recent years as a staunch critic of the Bernanke-led Fed’s easing policies and fiscal stimulus efforts.”
Romney’s two most influential economic advisors reportedly are R. Glenn Hubbard and Greg Mankiw. Both have argued generously on behalf of Chairman Bernanke, with Dean Hubbard recently having gone on public record in Bernanke’s defense (only, like Mankiw, to get overruled by Romney):
“Ben is a model technocrat. He gets paid nothing for getting kicked around all the time. I think they ought to pat him on the back,” Hubbard said in an interview, adding he has known Bernanke since they were “practically kids” and regularly speaks to him.
Chairman Bernanke is, indeed, a model technocrat. Taking his resignation, however, does not question either his character or his capability. It merely repudiates his — assuredly well-meant but, in practice, stagnation-inducing — easy money model.
Romney has been clear consistently about his intention to replace Bernanke. He told CNBC’s Larry Kudlow last January that “I’d like to appoint my own person. If I became president of the United States, I’d like to have a Fed chairman that shares my views and that I have confidence in. And there are things that, obviously, in the past, I think the Fed has made a number of mistakes. I don’t know that you’re going to avoid making mistakes, but I’d like to have someone new in that position.”
What could account for the tilt toward Taylor? Vice presidential nominee Paul Ryan is, by all reports, deeply respected by Romney. Ryan is one of a handful of political leaders who authentically grasps the critical importance of monetary policy. Taylor presents as Ryan’s most influential economic adviser.
Taylor’s economic blueprint, First Principles: Five Keys to Restoring America’s Prosperity, provides a pointed critique of the Fed’s monetary policy under Bernanke:
“Considerable empirical work now supports the view that the interest rates were too low for too long in 2003-2005 and were a major factor in the housing boom and bust that resulted. I first presented the evidence in the summer of 2007. Many Fed officials—including Ben Bernanke, who was there—were not pleased to hear my findings. … The way out of this predicament is … to reform the Fed. … As we have seen, under such reforms the Fed should focus on long-run price stability within a clear framework of economic stability. … [T]he Fed should publish and follow a monetary rule as its means to achieving long-run price stability.”
Ryan wrote of Taylor’s First Principles, “Taylor’s latest contribution to the national debate could not come at a more important moment. ‘First Principles’ is an important guide for policymakers and the citizens we serve, as Americans work together to restore the promise and prosperity of this exceptional nation.”
Of even greater note than his praise for Taylor, however, may be Ryan’s caustic critique of Romney advisor Greg Mankiw. This represents a level of public candor that political etiquette prohibits now that Ryan is the vice presidential nominee. It suggests what may be happening behind the scenes. In an important interview by James Pethokoukis, publishing in AEIdeas last August 15th, writes, “Also, here is what Ryan told me when I asked him late last year if the Federal Reserve should let inflation rise to help reduce U.S. indebtedness and boost nominal GDP growth.” Ryan:
Of course not. Are you kidding me? I know [Kenneth] Rogoff and these other people, [Greg] Mankiw, talk about that. Oh my gosh, that would be the worst … They think they can steer the car between the pylons going at a 110 miles an hour — and they can mop up any inflation at just the right point when it gets just a little too high. As if they can keep inflation to single digits because they can just fine tune the economy on dime. It’s never been done before, so what’s to think we can do that now?
The big question mark over the Romney growth package has been that of monetary policy. Romney, by tilting toward Taylor, is tilting toward the policies of Chairman Volcker and the early policies of Chairman Greenspan, collectively known as “the Great Moderation” that emulated the workings of the classical gold standard.
Good money is good politics and good policy. If Romney is elected, America is poised to return to good money, resume strong economic growth, and experience dramatic job creation. Better sooner than later. Mr. Romney? Declaring China a currency manipulator can wait. Clean house first. Show America’s currency-manipulator-in-chief the door. Take Ben Bernanke’s resignation on Day One.