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Why Did Republicans Turn Against the Fed?

“Regarding the Great Depression: You’re right, [the Federal Reserve] did it. We’re very sorry. But thanks to you, we won’t do it again.” Those were then-Fed Governor and current Chairman Ben Bernanke’s words to economist Milton Friedman in 2002, when a bunch of economic bigwigs gathered to fête the Nobel laureate on his 90th birthday. Bernanke’s paean to Friedman reflected mainstream Republican economic thought: The Great Depression wasn’t a failure of markets, but rather of central banking. If only the Fed had acted to prevent the bank failures and the accompanying collapse of the money supply, the Great Depression would not have been quite so great. In short, enlightened monetary policy could make Keynesian fiscal stimulus unnecessary—or so the conservative story went.

All of which makes the recent Republican war on the Federal Reserve that much more surprising. To be sure, Republicans didn’t imply last week that Ben Bernanke was guilty of treason—as Rick Perry did last month—but the letter Congressional Republicans sent to the Fed Chairman urging him not to further stimulate the economy was nonetheless a rare attack on the cherished independence of the central bank. Indeed, in just a few short years, denunciations of the Federal Reserve’s supposedly inflationary policies have become de rigueur among conservatives. Why has a party that once championed technocratic central banking become so hostile to it now?

Given their traditional views about the role of the Federal Reserve in stabilizing the economy, one might have expected Republicans to cheer the latest action proposed by the central bank last Wednesday. After all, here was an alternative to President Obama’s reviled stimulus spending. Instead, however, the ceaseless Republican broadsides against the Fed have made it difficult for some of the right-of-center economists with whom I spoke not to question Republicans’ motives. As Ken Rogoff, a professor of public policy and economics at Harvard and the former chief economist of the IMF, told me, “If the shoe were on the other foot and a Republican were in the White House, we might see different rhetoric.” Similarly, Scott Sumner, a professor of economics at Bentley University and author of the influential blog The Money Illusion, pointed out that “people on the right were pushing for monetary stimulus in the 1980s when inflation was much higher than it is now”—and a Republican was, coincidentally, in the White House.

To others, however, a purely cynical explanation of Republican antipathy towards the Fed does not seem sufficient. Rather, deeper philosophical and psychological factors—and factions—unleashed by the Great Recession seem to figure in as well. For one, notes University of Oregon economics professor Mark Thoma, the latest financial crisis has empowered fringe elements of the GOP—those who ascribe pseudo-mystical properties to gold and the gold standard—to take center stage within the party. In particular, this libertarian faction has offered up an alternative explanation of the crash that, as Thoma explained to me, provides “a nice moral with a villain you can point to.” Whereas the Friedmanite wing of the GOP traditionally absolved markets from blame for financial crises by saying the Fed had failed to do enough, this faction preferred to blame the Fed and other government institutions for doing too much. According to this line of argument, Fannie Mae and Freddie Mac caused the housing bubble, Obamacare and Dodd-Frank legislation are holding back the recovery, and the Federal Reserve’s panoply of lending programs during the height of the panic merely bailed out Wall Street and forestalled the necessary restructuring of the banking system. It’s a seductive—and reassuring—argument for those who take as gospel the Reagan maxim that “government is not the solution to our problem; government is the problem.”

Of course, the Federal Reserve invited some of this backlash with the opaque nature of its emergency programs in late 2008 and early 2009. The urgency of the crisis made the Fed’s ability to act without Congressional approval attractive to policymakers, but in doing so, the central bank usurped some functions that typically are the province of the Treasury. “It’s absolutely true that the Fed made itself vulnerable to [attacks] by starting fiscal policy and preserving the banking sector,” says Rogoff. Republican leaders have harped on this notion that the Fed continues to overstep its mandate. For instance, the bank’s quantitative easing (QE) programs, which entail buying long-term bonds, have drawn ire from Republicans, as have other supposed instances of the Fed dabbling in fiscal policy. Representative Paul Ryan slammed the Federal Reserve in an op-ed for what “looks like an attempt to bail out fiscal policy” by purchasing longer-dated Treasuries. The implication was clear: Ben Bernanke is complicit in Obama’s interventionist, big government agenda.

And then, finally, there are the inflation hawks. The idea that inflation can be too low is counterintuitive to the average voter, who associates inflation with less discretionary income. The simple calculus, as Sumner told me, is that “more inflation is bad and less is good.” The psychological scars of the stagflationary 1970s magnify this predisposition. “Most of the people in power remember waiting in gas lines,” says Thoma. The result, in Thoma’s estimation, is that “our collective memory is more European than it’s ever been, in terms of remembering the evils of inflation.” This thinking epitomizes what National Review senior editor Ramesh Ponnuru told me amounts to “an ongoing calcification of conservative economic thought.” Ponnuru describes this mindset as the idea that “the solution to a weak economy in the late 1970s, when the economic views of today’s conservatism formed, was cutting the top marginal tax rate and tightening money; therefore it must be the solution today.”

It is not clear if this intellectual Dark Age will pass. Bernanke has become such a persona non grata in Republican circles that it is easy to forget he is a Republican. Among these competing theories for Republican Fed-bashing, the scariest, of course, is that the attacks are not just cynical, but represent genuine belief. It’s enough to make a liberal long for Milton Friedman.

Matthew O’Brien is an intern at The New Republic.