Posted on 12/04/2015 7:39:10 AM PST by Isara
For a Republican, Ted Cruz has a unique criticism of the Federal Reserve.
The conservative Texas senator and contender for the GOP presidential nomination argues that the central bank is responsible for causing the financial crisis and recession because it kept money too tight in 2008.
Cruz's criticism of the Fed is nearly the opposite of the one typically voiced by Republicans, who generally fault Chairwoman Janet Yellen and her predecessor Ben Bernanke for their efforts to ease money. GOP complaints about the Fed have grown since the central bank lowered interest rates to zero and started quantitative easing programs. Those measures were unprecedented in the Fed's history.
Yet Cruz's criticism of the Fed, while unheard of on the national political stage, is a sophisticated one, shared by some prominent and credible economists, including supply-siders, libertarians and even members of the Federal Reserve system.
The Texan aired his views Thursday in a direct confrontation with Yellen during her testimony before the Joint Economic Committee.
Cruz began a round of questioning by stating that, in the summer of 2008, "the Federal Reserve told markets that it was shifting to a tighter monetary policy. This, in turn, set off a scramble for cash, which caused the dollar to soar, asset prices to collapse and [the consumer price index] to fall below zero, which set the stage for the financial crisis."
Then Cruz recited a line from Bernanke's recently released memoir, in which the former Fed chairman said the Fed's decision not to lower rates at the September 2008 monetary policy meeting was "in retrospect certainly a mistake." Does Yellen agree with her predecessor, he asked?
Yellen, although used to obscure or hostile questions from members of Congress, seemed taken off-guard.
"I think the Fed responded pretty promptly in easing monetary policy to the pressures that were emerging," she responded, saying that she wouldn't blame the financial crisis on the Fed failing to lower rates during the meeting. She also noted that the Fed had lowered its target rate to zero by December.
Yellen wouldn't have been surprised by Cruz's line of questioning if she had watched the Nov. 10 Republican presidential debate in Milwaukee.
Then, Cruz decried the Fed as a "bunch of philosopher-kings" and said that in late 2008, "the Fed tightened the money and crashed those asset prices, which caused a cascading collapse."
While Yellen is right that the Fed cut short-term interest rates to zero by the end of 2008, there is a case to be made that monetary policy tightened throughout the year, based on indicators other than nominal interest rates.
That case has been made, Cruz's office pointed out, by Nobel Prize-winning economist Robert Mundell, along with a group of generally free-market economists known as "market monetarists."
The idea is that although the Fed did eventually cut rates to zero, it did so too slowly - in particular by not cutting rates between April-December 2008 - to keep up with growing market demand for money. In effect, the Fed tightened money by not responding to market events, pitching the economy into recession.
Mundell, known as one of the intellectual architects of supply-side economics, said at a Reagan Foundation event in 2011 that tight money caused the financial crisis. "The Fed did some tightening, and the dollar started to soar," Mundell told Wall Street Journal editorial page editor Paul Gigot.
The dollar rose by 10 percent between the Fed's rate cut in April 2008 and the December meeting, against a broad range of currencies.
Furthermore, Cruz was right to note that the major declines in inflation and stock prices, both alternative indicators of monetary policy, occurred during the same period.
"Sen. Cruz basically gave a Market Monetarist critique of the Fed policy in 2008," Western Kentucky University economist and former Treasury official David Beckworth, one of the economists cited by Cruz's office, told the Washington Examiner. "The essence of this argument is that the failure of the Fed to respond properly in late 2008 turned an ordinary recession into the Great Recession. Ditto for the Fed's response in 1929-33."
That case was laid out in greater length in a 2009 study by Federal Reserve Bank of Richmond economist Robert Hetzel. In his paper, Hetzel wrote that "restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008."
Hetzel argued that financial markets were "reasonably calm" as late as summer 2008. "The intensification of the recession," he wrote, "began before the financial turmoil that followed the Sept. 15, 2008, Lehman bankruptcy."
Market monetarists share the view of the famed Nobel winner Milton Friedman, a hero to conservatives, that interest rates are not the best indicator of whether money is tight or loose. Instead, they look to indicators such as the ones Cruz cited, and in particular total spending in the economy, or gross domestic product unadjusted for inflation. Nominal GDP first declined late in 2008, even though the problems related to subprime mortgages had begun roiling the financial sector much earlier.
"I was very pleased to see those remarks," said Scott Sumner, an economist with the Mercatus Center think tank at George Mason University who has gained widespread recognition for market monetarism by writing prolifically about the Fed's monetary policy during the crisis.
Cruz's argument that the Fed caused the recession by failing to cut rates and loosen monetary policy fast enough might seem at odds with his other comments on monetary policy. Notably, he has called for the re-imposition of the gold standard, a stance that normally goes hand-in-hand with support for tight money and a strong dollar. The gold standard is a policy idea with virtually no support among top economists, as indicated by a 2012 survey of academics conducted by the University of Chicago's IGM Forum.
But conservative experts are happy to see him echoing market monetarists. Their explanation of the recession is amenable to conservatives in part because it places greater emphasis on the role of government failure and less on the private financial system.
"I'm very happy to see a prominent member of Congress taking up this issue," Norbert Michel, a scholar at the conservative Heritage Foundation, emailed the Examiner.
"I do agree with Bernanke that the Fed screwed up by being too tight in 2008," Michel wrote. "I think they were overly concerned with the inflation target. Further, I think Yellen (at least in public) and many others mistakenly point to interest rates to argue the Fed was loose during this period."
A good example of why Cruz is the best candidate we have. Simple grasp of history and the proper role of the entities that now rule our lives.
Perhaps the CFPB (Consumer Finance Protection Bureau) can protect us from the FED. /deep sarc
Cruz nails it again!
He IS the right man for the job.
Cruz recognizes that libertarian leaning Republicans are a party faction that has no champion, as Rand Paul has failed to pull in his father’s support by moving away from isolationism. Cruz recognizes that by appealing to the economic philosophy of the libertarians, an aspect of that belief system that is least offensive to national security conservatives and Christian conservatives, he may win some votes. Rand Paul will likely drop out fairly soon, to focus on keeping his day job as Senator from Kentucky.
We need the FED like I need prostate cancer.
While the above argument may or may not be true, Cruz has stated he would favor rule based monetary policy, a point of view I wholly agree with. Philosopher kings indeed.
Besides that, as a Milton Friedman disciple, he actually believes in a more libertarian economic policy.May God bless Rafael Cruz (Ted's father) for introducing Ted in his early teenage years to the works of free market scholars like Milton Friedman, helping him memorize the U.S. Constitution and ingraining in him that there is no better country to live in. There will never be another candidate for POTUS in my lifetime with Ted Cruz's unique upbringing and commitment to conservatism and free market economics.
Trump will be OK, but I just can't understand passing over Cruz, who truly is a once-in-a-generation, maybe even once-in-a-century candidate.
That would be like accusing the fireman of causing the fire because he didn't pull you out of the burning before the fire started. There was no "tight money" policy in 2008. There was one before July 2006 but that's when it ended and the Fed stopped raising rates. A year later in July 2007 the Fed began the easy money policy we got today that all the Fed-bashers hate so much.
OK so there were a couple months around July 2008 that the rate cuts paused, but if that's "tight money" then we got to say we've had "tight money" from 2009 til now. Frankly I don't believe Cruz argued anything of the sort but nobody's got a genuine Cruz link, just someone-else-said-what-Cruz-said links.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.