Ben Bernanke & John Roberts – Compare or Contrast?

Democracy is a government of the people, by the people and for the people. In a democracy, a government comes to power via free and fair elections. Today we see elections taking place in many countries in the world. But very few of these electocracies are democracies. Because a democracy is much much more than an electocracy. An electocracy can easily turn into mob rule in which the majority can run rough shod over minorities via elections.

The founding fathers of America were acutely aware of this danger. That is why they set up a system in which power is deliberately divided and segregated. They set up a system in which small states are protected from the dominance of large, populous states. This is why Iowa and New Hampshire matter so much in American Presidential elections.

A real democracy is much much more than a system of electoral primacy. A functionally viable democracy needs Institutions; Institutions that are set up, maintained and obligated through out their existence to consider the nation’s good rather than the interests of a single political party, community or ideology. The heads of such institutions have the mandate to maintain, above all, the legitimacy of their institutions in the eyes of the people.

We witnessed this principle in action a few weeks ago. The Supreme Court of the United States is one of the three centers of power in America. Unlike the Executive and the Legislative branches, the Supreme Court is staffed by people appointed for life. Today, the Supreme Court is as divided as it has ever been. It is made up of two camps, liberal and conservative. This division reflects the polarization of American society which seems equally divided among left and right leaning people.

No issue has polarized America as Obamacare, the controversial health care law pushed through in 2009 by a democratically controlled Congress. This is the signature program of President Obama. This law is hated by Republicans and conservatives. The ultimate decision about its legality ended up with the Supreme Court. Almost every analyst, every observer expected this law to be struck down by the 5-4 conservative majority in the Supreme Court, the deciding vote being that of conservative Chief Justice John Roberts. This was expected to deliver a defeat to President Obama and damage his chances of reelection.

In an absolute stunner of a decision, Chief Justice Roberts voted to uphold Obamacare. He didn’t just vote for it. He found a legal contrivance to justify upholding it. In doing so, he acted against his principles, the legal thinking that has dominated his career. Chief Justice Roberts did so in the interests of a far greater cause, the legitimacy of the Supreme Court, the institution that has been entrusted in his care. In our opinion, this will go down as an act of democratic patriotism, an act of selfless determined will to protect a central pillar of the American democratic system. 

There is another American institution that finds itself in the same situation. This institution touches the lives of the American people even more than the Supreme Court does.  We speak of course of the Federal Reserve of the United States. Like the Supreme Court, the members of the Federal Open Market Committee (FOMC) are appointed and not elected. 

Today, the FOMC is more divided than it has ever been in its 100-year history, according to veteran Fed-watchers. Today’s Federal Reserve under the leadership of Dr. Ben Bernanke has also been the most active Fed in the institution’s history.  Under his leadership, the Fed’s balance sheet has grown to unprecedented levels. Whether his aggressive programs work or not, Chairman Bernanke is determined to do more, more and more to pump liquidity into the American system.

Next week, Dr. Bernanke speaks at the annual Jackson Hole conference. In 2010, he used this forum to make the case for QE2, Quantitative Easing Two, a program that caused oil prices and food prices to shoot up. Last year, he used this forum to make the case for his Operation Twist, a program to buy longer-maturity Treasury bonds and sell the Fed’s holdings of shorter-maturity Treasury notes. Whether this program has achieved much is open to debate.

Next week, Chairman Bernanke is widely expected to make the case for QE3 or Quantitative Easing Three, another program by which the Federal Reserve will pump more liquidity into the system, a program that is designed to make the stock market rally and create confidence. The “doves” in the FOMC want to do something very big, as Jon Hilsenrath of the Wall Street Journal reported on Friday. The “hawks” are vocally against any such QE3 because QE2 has failed and they think the Fed is getting less and less in return for its activism.

Like the Supreme Court, the Federal Reserve is polarized because America is polarized. Chairman Bernanke is seen to be as much in President Obama’s camp as Chief Justice Roberts was seen to be against President Obama. Launch of QE3 and the stock market rally expected to result from it will be as positive for President Obama’s reelection as the decision to strike down Obamacare would have been negative for President Obama’s reelection. 

The timing of QE3 makes it even more political than the Obamacare decision. The Presidential campaign begins in earnest with the Republican and Democratic conventions. The Republican Convention begins next week and ends the day before Chairman’s Bernanke’ speech in Jackson Hole. In these circumstances, the launch of a big QE3 program against the wishes of a strong, vocal hawkish group in the FOMC will be seen as a political intrusion by an institution designed to be apolitical.

We think the legitimacy of the Federal Reserve is at stake here just as the legitimacy of the Supreme Court was at stake in the Obamacare decision. Just listen to what Rick Santelli, CNBC’s MVP and bond market reporter, said this week:

  • Thursday, August 22 at 11:08 amIs the Fed Apolitical or is the Fed A lot
    November 6 is the election… in  mid-July in front of the
    Senate Banking committee there was some instructions, in my opinion,
    given to Ben Bernanke. Listen to Senator Schumer – ‘the Fed is the only
    game in town, so get to work, Mr. Chairman
    ‘… I think that Bernanke
    seems to be dragging all this up in a timeline that certainly seems to
    intersect with November 6th.”
  • Wednesday, August 22 at 4:00 pm –   “we have two meetings before the election; in September and October….let’s really really call it the way some people are seeing it. Ben Bernanke, in my opinion,  wants to keep his job, he wants to clean up this mess. I am pretty convinced if Mitt Romney wins he is not going to reaffirm Ben Bernanke for the job. So it seems a little political to me that we’re going to see a set up for the September meeting, a outline for October just weeks ahead of the election.  I am sorry, but if it walks like a duck and quakes like a duck, it’s political…”

Senator Schumer and the entire Democratic contingent in the Congress want Bernanke to act and act forcefully to pump new money. The Republicans don’t want him to pump additional hundreds of billions into the system. President Obama wants Bernanke to pump, Governor Romney does not. So this is as polarized, as politicized an issue as Obamacare.  And like Obamacare, this decision should be left to the American people to decide on November 6th.

And Chairman Bernanke has an out that Chief Justice Roberts did not. Justice Roberts had to make a ruling. Chairman Bernanke does not. He can merely punt until the FOMC meeting in December  2012. After the election, he can do what he wants without appearing political. 

We suspect Chief Justice Roberts is supremely self-confident. We know Chairman Bernanke is supremely self-confident. We believe Chief Justice Roberts understands the good his institution can do for America. We know Chairman Bernanke understands the good his institution can do for America. Justice Roberts  understood that his ego had to be suppressed, his own beliefs had to be overridden to protect the long term legitimacy of his institution.

Does Chairman Bernanke understand what Justice Roberts did? Does he understand that the viability of the American System, the long term legitimacy of the Federal Reserve is far more important than artificially creating a stock market rally before the November 6th election?

We will know the answer on August 31 and on September 13th. Then we can judge whether we compare   Chairman Bernanke with Justice Roberts or contrast him from Justice Roberts?

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