Tuesday, February 21, 2017

To Wish Impossible Things

it was the sweetness of your skin
it was the hope of all we might have been
that fills me with the hope to wish
impossible things

-        The Cure

Fix the Fed.  This is the wish of John Mauldin, advocating the advice to be found in the book authored by Danielle DiMartino Booth, Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.

Booth worked for several years for Dallas Federal Reserve President Richard Fisher; she left the Fed when he resigned.  With this experience she offers her advice for reform.  And Mauldin offers that her advice should be heeded.  According to Booth, the Fed should be reorganized; according to Mauldin:

This is a powerful to-do list that I hope every Congressman and Senator will read.

Mauldin offers the final chapter of the book – in this chapter will be found the key takeaways and advice about reorganization.  Let’s take a peek:

First things first. Congress should release the Fed from the bondage of its dual mandate.

Per Booth, the Fed should focus only on price stability (whatever that means).  Resolving unemployment should be the business of congress. 

The benefit of this?

The added bonus: shedding the dual mandate will discourage future forays into unconventional monetary policy.

Wait a minute.  Let’s ignore the unemployment picture of the last ten years and focus on the situation of “price stability.”  “Price stability” (aka price inflation as measured by the CPI) has been unacceptably low to those at the Fed since 2009.  It is only now moving into something approaching acceptable territory.

So…again…ignoring the whole unemployment part of the mandate and let’s just say the Fed was only focused on price stability for the last ten years…explain to me when and how the Fed would have stopped implementing its “forays into unconventional monetary policy” given that they have only now reached something approaching (their definition of) price stability?

Ok, what’s next?

The floor on overnight rates must be permanently raised to at least 2 percent and Fed officials should pledge to never again breach that floor.

Pledge?  To whom?

Perhaps those congressmen and senators who read this book could pass a law to this effect.  I am quite certain that they will not rescind it when the next Paulson and Bernanke come whining to them about how the world is coming to an end.

Anyway, who says 2 percent is a floor that should never be breached?  Why not 1 percent or 4 percent?  Is there a law of economics on this matter of which I am not aware, or is this just Booth’s version of central planning?

Moving on:

Limit the number of academic PhDs at the Fed, not just among the leadership but on the staffs of the Board and District Banks.

I can agree with this, as long as the limit is zero.  Otherwise, you tell me: will the thinking of 100 academic PhDs result in better central planning than the thinking of 1000?

Bring in more actual practitioners – businesspeople who have been on the receiving end of Fed policy, CEOs and CFOs, people who have been on the hot seat…

Oh, please no.  Is this advice offered because the CEO and CFO of General Motors, JPMorgan Bank, General Electric, and Boeing have no vested interest in artificially abundant and inexpensive credit?  To ask the question is to answer it.

Then we have term limits for the governors; all district presidents with a permanent vote on the FOMC; redraw the districts to reflect today’s economy; better focus on regulation.  You know, deck-chairs-on-the-Titanic kind of stuff.

And then this whopper:

Send most of the PhD economists back to academia where they belong.

…who will then be lavished with grants from the Fed to produce research that supports evermore intervention.

Booth ends with a statement that makes me wonder why she believes reorganizing the Fed is even an objective worth considering (emphasis added):

Finally, let nature take its course. Reengage creative destruction. Markets by their nature are supposed to be volatile. Zero interest rates prevent the natural failures of weak companies, weighing down the economy with overcapacity for generations.

Recessions might have been more frequent, the financial losses greater for some, but if the Fed had let the economy heal on its own, America would have been stronger in the end and the bedrock of our nation, capitalism, would not have been corrupted.

“…let nature take its course.”

If this is the mandate for the Fed, why have a Fed?  Why have a lender of last resort? 

Letting “nature taking its course” in the economy means that price discovery happens without influence by anyone other than market actors trading in their own property; letting “nature take its course” in the economy means profit and loss – and with enough loss for an individual firm, bankruptcy.

I agree: let nature take its course.  And there is only one way to do this in an economy if you do not want to corrupt “the bedrock of our nation,” capitalism:

End the Fed.

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