When Monetary Policy Is Fiscal Policy

Martin Wolf is good at startling sentences. Today he preps us with this left hook:

As Robert Mugabe has shown, anybody can run a printing press successfully.

Only to follow up with this right jab:

At the zero-rate boundary, fiscal and monetary policies become one.

Is this the econowonky way of saying "we’re all Zimbabweans now"? I’m not sure. Wolf’s main point, I think, is that if you can’t cut rates, you can only conduct monetary policy by printing and spending money — and spending, at least, is normally something Treasury’s in charge of, rather than the Fed.

Which does raise an interesting political question. If fiscal and monetary policies are indistinguishable in a zirpish environment, then who’s in charge of fiscalandmonetary policy?

When overnight rates were still noticeably positive, it seemed quite clear that Hank Paulson had the upper hand over Ben Bernanke, and was calling the shots. More recently, with Paulson’s tenure as Treasury secretary coming to an end and the Fed funds rate essentially hitting zero, Bernanke seems to have more clout.

And after January 20? That’s an interesting one. Geithner and Bernanke have sat together on the FOMC since Geithner joined the New York Fed in 2003, so they know each other well; what’s more, neither of them has the kind of ego which is likely to result in turf wars or pissing matches. But they do have significantly different mandates: the Treasury secretary, for instance, concerned with the economy as a whole, will be much more inclined to do things like throw money at automakers than will the Fed chairman.

Just to complicate matters, there’s Larry Summers, too — whom I’m sure thinks that he has a role on a par, in importance, with those of Geithner and Bernanke, and who is once again being mooted as a possible successor to Bernanke in 2010. (Please, no: his mouth is far too big for that job, and there’s no indication that he’s a good chairman of anything, let alone the FOMC.)

The best case scenario is that Geithner, Bernanke, Summers, and the rest of Obama’s economic team join seamlessly to form a Committee To Save The US Economy. But when does anything work seamlessly in Washington? My guess is that there are going to be some frayed egos by the time this is all over.

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