It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable with the Fed withdrawing its stimulus. Alan Greenspan
History is filled with power struggles: Who owns the Mediterranean? Rome or Carthage, Which is the True Church? Rome or Constantinople, Whose vision of God is purest? Christ's or Mohamed's, Who decides the rules of divorce? The Pope or the King of England, From whence does the controlling power flow? The King of France or the people.
Who has the ultimate power over money? The Fed or Congress (and by the extension, the people, unless Congress wants to side with the Fed).
These are the showdowns that blaze the path of man, until the path fades and the cycle begins again. While these battles often begin in ivory towers, so to write, they end in blood and death.
Take the question of taxation. The American colonists rallied around the slogan, "no taxation without representation," and fought (and died) until the British gave up. Shortly thereafter American colonists, angry about taxes on whisky, rallied around the same slogan, and were crushed by the very same Commander in Chief who fought the British. Reason did not provide the answer (which is not to argue that the answer was not reasonable). Might made right.
Mr. Greenspan (and many others who float in policy circles) seems to think (judging by expressed views) that reason is the ultimate judge of such pivotal questions-only when times are easy, Alan. Angry, hungry, out of work and fearful people are rarely reasonable. People loved the Fed when times were easy but they are starting to hate it now that they are paying the price.
I've just finished a read of Simon Schama's Citizens: A Chronicle of the French Revolution as it seemed fitting given the emergence of a new historical power struggle. Fitting, I think, in the sense that in both cases a reasonably long lasting organizational structure had been found wanting, and despite all the proof of failure, supporters of tradition were reluctant to give an inch (or when given, they tried to retake). In the former case, three years after the Bastille was stormed, the heads began to roll, and the question was decided.
Admittedly, it is unfair to Louis XIV, the Sun King, to see Alan Greenspan playing his role- this would place Ben Bernanke in the unfortunate role of Louis XVI and his wife (perhaps his statement about the recession being over is on par with Marie Antionette's apocryphal "let them eat cake")- but then again maybe not. Both the Sun King and Mr. Greenspan opened the floodgates on spending and left it to the future to clean up the mess.
But this is a digression.
My thrust is a reminder. Policy is not chess. Greenspan wishes the Fed to be independent enough to withdraw the stimulus and fears Congress might get in the way. If Unemployment keeps rising and the Fed tries to withdraw the stimulus in winter, say, to stem a rout in the US$ (not a low probability forecast) obstructionism in Congress may be the only thing that stops the people from storming the Fed.
In other words, if the Fed remains independent, and that independence means crushing the real sector to maintain the US$ system, Liberty for the Fed may well bring Death to the Fed.
Sadly, I agree with Greenspan, in theory. Alas, his faith in the Fed's ability to fix a mess led him to miss opportunities to avoid it altogether. The die is cast.
Greenspan, however, seems not to realize this, inter alia. To wit, he went on the say, "if inflation rears its head." How high does Gold have to go (it has risen by a factor of 4 since Gordon Brown dumped Britain's stocks) before inflation is recognized?