Negative externalities of Congress

So they’re going to torpedo Bernanke’s nomination because they need his blood to placate their base. Ms McArdle says:

I see the political logic, but the economic logic is pretty poor. Bernanke didn’t become Fed chair until 2006, long after it was realistically possible to do much about the bubble except wait for it to pop. He shepherded us through the financial crisis without another Great Depression–maybe not perfectly, but no Fed chair would have been perfect. The markets have confidence in him. Spiking his nomination may have grim effects on 401(k)s throughout the land.

But doesn’t this suggest the political logic is piss poor, too? The uncertainty of monetary policy (not to mention financial regulation) hurts the voters’ 401(k)s. I don’t take this stuff that seriously, but reading tealeaves of stock market movements, one could easily attribute the 5% drop in markets this week to this uncertainty. Voters who are 5% less wealthy are less likely to vote for you.

But individually, it makes sense for Senators to vote against Bernanke’s reappointment. They can tell their inattentive constituents they’re “doing something” about something. Or something else of the “off with his head” flavor. This will work for the marginal voter, thus marginally improving the chance of reelection for each Senator that votes no.

Uncertainty is pollution created by Senators doing what’s in their own best interest. As theory predicts, there’s more uncertainty than is socially optimal. Because this pollution is created by the government, what we need is a benevolent super-government to fix this “market” failure. Somebody call the UN or maybe after they fix this global warming thing the IPCC can help out.

10 thoughts on “Negative externalities of Congress”

  1. It should also matter who will replaces Bernanke. If it’s Larry Summers then I predict bad bad things. That is, conditional on monetary policy being important and so on.

  2. If you assume money matters and if you assume politicians follow-through on threats, then you’d take this pretty seriously: “However, it is time for a change,” [Sen. Boxer] said. β€œIt is time for Main Street to have a champion at the Fed.”

  3. AC, I agree that Summers would be a bad choice, though I assume for somewhat different reasons. Volcker on the other hand…

    Regarding Bernanke many people that oppose him should be careful what they wish for. From my reading of it, the Ron Paulite/goldnuts think the Fed should be abolished, the Plosserites/inflation hawks want tighter policy to deal with inflation. Also, QE supporters want looser policy, and lefty’s/populists want Bernanke out to “help Main Street”, whatever that means. I don’t see how any change that would satisfy one group would really make another group happy, except some kind of replacement that likes QE and somehow “helps Main street.”

    For me, barring a massive enough change that would raise interest rates above zero, marginal changes will just affect excess reserves. Reversing interest on reserves couldn’t hurt either I guess, but the potential for a worse outcome far outweighs the upside of a change.

  4. Speaks pretty sadly of the Democratic base if, after all the other unmitigated shit that went on from 2000-2008, it’s Ben Bernanke‘s head they want on a platter.

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