John Mauldin’s current “Thoughts From the Frontline” includes excerpts from two outside sources, and I find both worthy of comment.
Mauldin introduces the first:
Last Monday an op-ed in the Wall Street Journal, penned by five PhDs in economics, among them a former Secretary of the Treasury and an almost-guaranteed Nobel laureate (and most of them former members of the President's Council of Economic Advisors) minced no words in excoriating the current policy.
The five referenced by Mauldin are George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor. “The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.”
They begin by listing various imbalances of government treasury and Federal Reserve policy:
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion?
Did you know no remaining candidate for President is suggesting concrete policies that will result in anything different? This will not change, except when it has to be changed.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve?...The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
Did you know the world is awash in government debt, much of which is now being supported by central bank action, and no politician is offering a concrete solution? This will not change, until the Fed is faced with mass- or hyper-inflation.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process?...The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year.
Did you know it is the Fed’s primary responsibility to ensure the survival of the large money-center banks?
This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation….If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
Did you know there is no possibility of unwinding without causing a deflationary depression, and there is no possibility of continuing without causing an inflationary depression?
By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know this “replacing” of decentralized markets is not a new phenomenon, but one that was in place while each of you had positions of prominence in various government policy-making institutions?
Then they move onto government spending and regulatory policy:
The issue is not merely how much we spend, but how wisely, how effectively.
No, the issue is how much the government spends. Every dollar spent by the government reduces the choices that would have been made by actors in a free market. It is transactions made in a free market that increase wealth. Transactions via taxation and transfer payments do not.
Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008.
Every year the size of the Federal Register increases, even while each of these policy makers had power. Every year more regulations are added to the books, with few, if any, eliminated.
They then go on to point out the further increases in the deficit certain to come with Obama, compounded with the unfunded liabilities of Social Security and Medicare. Of course, these liabilities were already baked in the cake when each of these men had positions of authority to do something about it.
The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage.
No, it is impossible to manage. A few men in a room cannot centrally plan an economy – not in the Soviet Union (where we have already witnessed the failure of this belief), and not in the United States (where the failure is unfolding before our eyes in real time).
Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."
I always thought not having debt would be the price of liberty.
History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s.
A group of people decided they wanted to be governed differently – kind of like those Yankees in 1776 – a government of their own choosing if you will. That they were prohibited from doing so is not necessarily a point of honor for carrying debt. What would Jefferson say?
As to defeating totalitarian governments, I thought these guys were from the Hoover Institution. Are they not familiar with the work of the Institute’s namesake? That war was fought in conjunction with a very totalitarian government as an ally – one that was not defeated, but raised to a position of global prominence. This doesn’t seem to be a point of honor for carrying debt, either.
The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.
Everything would be fine if we just had our people in charge of central planning, trust us. The future was also “now” when each of these gentlemen could have suggested doing something about it. The problems are not new – they were baked into the pie for decades.
Hasn’t everyone already had a turn feeding off of this host? It there any option left untried? Why doesn’t the solution include questioning the entire structure?
The second recommended article from Mauldin is from a recent speech by FOMC member, Dallas Fed President Richard Fisher, given to the Harvard Club of New York City on Monetary Policy. Fisher is what passes for a hawk on monetary policy – not hawk as in “why are we central planning?” but hawk as in intervene, but not as much as those other guys want to intervene. Here, he is referring to the announcement by Bernanke last week of QE to infinity:
It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week.
Then, Fisher makes the statement regarding the economic quackery of macro-economist that I have been trying to make – however, I have never said it as well:
…we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before.
They don’t know what they are doing. They don’t know how the economy got here. They don’t know why the economy remains here. They don’t know how to get the economy out of here. They are recommending actions and implementing solutions with no idea of the road they are travelling. They are quacks.
I will offer a suggestion: read Mises’ "Human Action."
He then offers that the models aren’t working correctly:
Certain theories and various hypothetical studies and models tell us that flooding the markets with copious amounts of cheap, plentiful liquidity will lift final demand, both through the “wealth effect” channel and by directly stimulating businesses to expand and hire. And yet from the perspective of my watch station—as I have reported time and again—the very people we wish to stoke consumption and final demand by creating jobs and expanding business fixed investment are not responding to our policy initiatives as well as theory might suggest.
People aren’t acting like computer models. I have a suggestion: read Hayek’s Nobel acceptance lecture.
He then goes on to lay the problem at the feet of fiscal uncertainty and Europe. Both certainly are problems, neither have (nor should have) anything to do with the Fed. He says that CFOs don’t blame a lack of credit for sluggish growth; they cite reasons like regulatory uncertainty.
He further outlines the outer edge of acceptable debate regarding monetary policy – further accommodation may not be helpful and may be harmful. He describes that “Admiral Bernanke” (his speech was given using a nautical theme), listened to the varying opinions in the policy committee, and chose to charge full steam ahead.
Fisher identifies that, after housing, the other two sectors operating well under “long run potential” are aircraft and automobiles. I imagine this suggests the types of assets the Fed will buy next, when the purchase of mortgage-backed securities fails – as it will.
After once again rightly laying many burdens on Congress, he outlines again that the Fed is doing all it can within its mandated powers. He describes the robust conversation that happens at each meeting of the committee:
The FOMC is doing everything it can to encourage the U.S. economy to steam forward. When we meet, we consider views that range from the most cautious perspectives on policy, such as my own, to the more accommodative recommendations of the well-known “doves” on the committee.
Keep in mind: he has already said they don’t know what they are doing. Yet, not knowing what they are doing, they debate initiatives about what they should be doing! How about doing…nothing?
If you want to save our nation from financial disaster, may I suggest that rather than blame the Fed for being hyperactive, you devote your energy to getting our nation’s fiscal authorities to do their job.
Why not both? They are two sides of the same coin – both doing their part to centrally manage an economy. One spending unconscionable amounts on every folly; the other supporting this vice.
He ends with a statement reinforcing the power of the people to control the direction of this ship of state:
You—the citizens and voters sitting in this room and elsewhere—are ultimately in command of the fleet that sails under the flag of the United States Congress. Demand that it performs its duty.
Of course, he knows the people are not in charge, and therefore are not in a position to demand anything. But making such statements allows the charade of representative democracy to continue. Further, as no individual has the power to hold a monopoly over money and credit, no group of people can have the power to grant this to an agent.
Challenges to the mainstream are allowed, as long as the challenges remain…mainstream. The song and dance continues.