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Blame Obama for bad monetary policy, not Republicans


One very common response to my piece calling neglect of the Federal Reserve the biggest economic policy mistake Obama has made has been to say that the real villain here is Republican obstructionism. Just look at the way Senate Republicans blocked the appointment of Nobel Prize winner Peter Diamond to a Fed Board seat and you can see what Obama was up against. I generally take the view that almost every domestic policy shortcoming of the Obama era can be laid at the feet of Republican Party obstructionism or Republican Party ideology. But not this one.

The root cause of Obama-era monetary failures has been timidity from Ben Bernanke and Janet Yellen combined with erroneous opinions about monetary policy from Obama himself. The Diamond episode, seen properly, actually makes that case.

For starters, though Diamond is a brilliant economist and a solid liberal, he's not a monetary economist and his views on monetary policy are not dovish. Instead of trying and failing to appoint a proponent of monetary stimulus, Obama tapped a guy who shares the Lawrence Summers / Timothy Geithner view that monetary policy was impotent. It's no surprise that Obama would tap someone like that, because that's what Obama thinks. The problem is that Obama is wrong.

Meanwhile, Senate Republicans blocked Diamond because of his "Keynesian" views on fiscal policy possibly mixed with payback for the blocked confirmation of Randall Kroszner back in 2008. But unlike Diamond, there is actually evidence that Kroszner held correct pro-stimulus views on monetary policy.

Which is to say that neither Obama nor his congressional antagonists showed any real sign of caring about Federal Reserve appointees' views on monetary policy. This simply isn't a topic that the current party activist and interest group clusters focus on. Currency policy has been politically salient in the past and could be in the future, but it's not now. But if Obama had wanted to appoint pro-stimulus Federal Reserve governors, he could have gotten it done easily enough by agreeing to appoint some folks who agree with Republicans about other things. He could have put Kroszner back on the board as a gesture of good will. He could have tapped former Bush adviser Greg Mankiw, who has a good post out just today making the case for low interest rates. He could have gone for Kenneth Rogoff.

But Obama didn't think creatively about how to put advocates of monetary stimulus on the Fed board because Obama does not think it is important or advisable to put advocates of monetary stimulus on the Fed board. The rise of cranky hard-money views among Republican Party politicians has not been helpful, nor has their generally cavalier attitude about governance. But sheer White House error is a big deal.

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