What About Main Street?

Ben Bernanke will probably be confirmed to a second term as Chairman of the Federal Reserve in the next few days. But opposition to his nomination has emerged on both sides of the political spectrum. On the right, Sen. John McCain (R-AZ) has declared that Bernanke should be held accountable for contributing to the economic meltdown. On the left, MoveOn accuses Bernanke of showing “no interest in helping regular folks who can’t find jobs.” But fear that Bernanke might not be confirmed probably contributed to the fall of the Dow last week, and Treasury Secretary Timothy Geithner warns that the markets would view a failure to reappoint Bernanke as “a very troubling thing to the economy as a whole.”

The question is, why should we care? Supposedly, the markets could be so shaken by the prospect of losing Bernanke that credit would dry up, slowing investment and threatening the economy. Of course, people said the same thing about Alan Greenspan before he retired—even though he now appears to be partly responsible for fueling the housing bubble and the derivative trade that led to the current crisis. And it hardly seems plausible that our economic system is so fragile that it hinges on any single economist. It’s true of course, that if Bernanke’s nomination were defeated that the markets would likely drop, and—at least in the short run—investment would slow. But what’s missing from this discussion is that fact the health of the economy depends on more than just the health of the financial markets.

The financial markets are at best a partial indicator of the health of economy as a whole. They broadly track the performance of the economy when it does particularly well or poorly. And in general the better the market is doing the more money there is to invest in the economy as a whole. But the link between the two isn’t as close as people imagine. Although news services dutifully report market movements every day, the truth is that the markets’ daily movements really matter only to the handful of professional investors making short term bets. The day-to-day movements of the markets are usually about as relevant to the economy’s overall prospects as daily temperature fluctuations are to long-term change in the global climate. You can’t read much into one cold day.

The truth is that financial markets are mainly an indicator of how well people who have money to invest are doing. In spite of the fact that more people own stocks now than used to, market performance is really a strong indicator only of how a relatively small number of the country’s most wealthy are doing. And while in the long run the financial fortunes of the wealthy and the rest of us are probably linked, in the near term their interests are not the same. You don’t have to be a Marxist to see that what’s good for shareholders is not necessarily the same as what’s good for the people who work for them. The more companies pay their employees, the less profit shareholders make. That’s why the stock market rises on news that wages are falling. By the same token, what’s good for the companies listed on the Dow Jones Index isn’t necessarily good for the rest of us.

Bernanke, of course, is an easy target for politicians hoping to capitalize on anger at Wall Street banks. And it’s certainly true that removing Bernanke for political reasons would undermine confidence in the ability of the Fed to operate free of political pressure. But, as Paul Krugman argues, there are legitimate reasons to wonder whether Bernanke is doing the best job he could. While he seems to have been instrumental in keeping the economic crisis from becoming much worse, he also failed to see the crisis coming in the first place. And now he is not doing much to push for meaningful financial reform or reduce unemployment. Instead, he is primarily concerned with keeping inflation low—even though it is already fairly low—and with the health of financial markets. Part of the reason the markets would fall if Bernanke weren’t confirmed is his closeness with Wall Street, which trusts him to continue to put their interests ahead of Main Street.

With their opposition to the capital gains tax, the estate tax, and a substantially graduated income tax, Republicans are usually seen as representing the interests of the wealthy. But, as Kevin Williamson says, Wall Street has actually been one of the Democratic Party’s biggest sources of support. It’s no coincidence, as Matt Taibbi recently documented, that the Obama administration’s economic policy is largely the product of a group of Wall Street insiders connected with former Treasury Secretary Robert Rubin. But while the health of the financial markets is important, it would be a mistake to confuse it with the health of the economy as a whole. Democrats would do well now to remember what William Jennings Bryan’s famously said in his speech to the Democratic National Convention in 1896:

There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests up on them.

For whether or not Bernanke is appointed to a second term as Chairman of the Fed, if the Democrats continue to focus on financial markets at the expense of employment and wage growth, they’ll pay the price in the next election.