Up and up goes the interest rate. Down and down goes the
. Bigger and bigger gets the tech-stock bubble; by now, everyone knows it will pop. A fierce sorting-out seems to be on its way. And if it happens by summer, it is sure to echo in November.
As you may have noticed, we are preparing for an election in this country. The Democratic nominee -- particularly if it is
-- will be running on a central argument, namely the strength of the economy, full employment without inflation and the wealth created by new technologies, the Internet, e-commerce and the boom in the stock market.
But suppose it is all in ruins by then?
Now I truly do not believe that
personally cares who wins the 2000 presidential elections. Greenspan is a conservative Republican and a past chair of the
Council of Economic Advisers
, but his reputation was made, in some ways, by
. Clinton conducted fiscal policy to the
exact taste. He also avoided any hint of criticism of Greenspan and therefore allowed the man all the credit he could want. Greenspan knows that he can count on a similar relationship with Al Gore.
But what about the others who are making or advising on decisions at the Federal Reserve? At least two of them -- regional bank Presidents William Poole of St. Louis and Jerry Jordan of Cleveland -- are politicized monetarists who served faithfully on the Council of Economic Advisers for
. Many of the others are fairly simple conservatives whose horizons lie wholly within the Republican Party. By what edict is it writ that these men lie beyond the reach of temptation to use their power for a political end?
And while the Federal Reserve's regional banks are full of Republicans, including party functionaries, there is no corresponding presence of combative Democrats. Two critical slots on the board are vacant. But even if they were not, Clinton has no power of appointment to the Federal Reserve regional bank presidencies, a kind of farm league of the Fed system. And his men who are on the board are also mostly apolitical, drawn from investment banking (Vice Chairman Roger W. Ferguson Jr. of the Boston district) or economic consulting (Laurence H. Meyer of the St. Louis district); they are a group deeply lacking political testosterone since the tough-minded Alice Rivlin and Janet Yellen left for other things.
If the Fed disrupts our elections, it won't be the first time. Back in 1972, the egregious Arthur F. Burns virtually appointed himself to
re-election committee, pumping up the economy as hard as he could and advising the president about it in detail at the time. In 1980 Paul Volcker's first recession elected Ronald Reagan. In December 1991, Greenspan himself delivered
a Christmas present of a sharp interest-rate reduction. (The help came too late: The economy jumpstarted, but the statistics did not hit the news until November 1992, just after the election.) And in 1994, the Fed's abrupt turnabout on interest rates upset the markets and caused enough angst to help unseat the Democratic
Congressional control is once again an important question in the 2000 campaign. A strong and serene economy might help
for the Democrats, and there is even some possibility -- though remote -- of
doing the same in the
. That would be bad news on Constitution Avenue, whatever the presidential outcome. The Fed has always relied on congressional Republicans to protect it from reformers and troublemakers among Democrats on the banking committees; it is quite sure that even the Olympian Greenspan (a thousand-dollar contributor to
Sen. Jesse Helms
, no less, in past elections) has a partisan interest in the congressional battle.
Outrageous, you say? A slur on a fine, public-spirited institution? Perhaps. But if you think as much, then please explain to me why,
, interest rates are shooting up. Why are we hearing, via the usual leaks and insider gossip, that the Federal Open Market Committee is determined to drive the economy down? Why is the surge of productivity growth being treated as a nonevent, just as though it didn't happen? On what
is the supposed fear of inflation justified? On what
is it said that higher interest rates will sustain, rather than eventually destroy, our full employment prosperity?
Until someone comes up with a coherent answer to these questions, I am thinking the worst. And let me also suggest that if indeed the Democrats do survive this sneak attack, they ought to do something about all the Republicans at the Fed, first opportunity they get.
James K. Galbraith is author of Created Unequal: The Crisis in American Pay (Free Press, 1998) and director of the University of Texas
Inequality Project. A professor at the University of Texas at Austin and senior scholar at the Levy Economics Institute, he worked for many years on the staff of the House Banking Committee, where he conducted oversight of the Federal Reserve. He welcomes your feedback at