By JEFFREY BELL AND RICH DANKER
There is thought to be a pitched battle raging within the White House over President Obama’s pick to succeed Federal Reserve Chairman Ben Bernanke when his term expires early next year.
Bernanke’s deputy Janet Yellen is the liberal favorite for her vocal position in favor of continued monetary stimulus, while the left views former Clinton Treasury Secretary and Obama economic adviser Larry Summers with suspicion for his chumminess with Wall Street and perceived ambiguity on current Fed policy.
But background and philosophy matter relatively little in what Obama expects his next Fed leader to do: monetize the deficit.
So far the media have painted Yellen and Summers as polar opposites according to their differences of gender, personality, career path and alliances within Democratic politics.
But this analysis fails to grasp the single fact that makes their shared approach to the central bank inevitable: easy money will be required to accommodate expansionary fiscal policy, something Obama is doubling down on and Summers has always advocated.
The Keynesian policy mix requires monetary policy to service its deficit spending. Otherwise there wouldn’t be a market for the government’s debt at acceptably low interest rates. This idea goes back to World War II, when the Fed delivered on its promise to buy enough U.S. bonds to cap wartime interest rates at 2.5%.
Making Debt Cheap
An overlooked component of quantitative easing has been its role as the enabler for large deficits at minimal cost. Since the beginning of this year, the Fed has stuck to the pledge it made to buy public debt at the rate of $85 billion per month. …